Understanding Scale Economies Shared and Why You need to Let "Runners Run"

Having traded & invested for years there is an underlying and intangible element which I have failed to fully capture in appreciating growth opportunity. When I think a business has saturated a market, such as a Chipotle, Home Depot, Ulta, Sherwin Williams, Costco, AutoZone, Microsoft, AMD or a Tesla its largely a guess or hunch that larger investors will soon start to look for greener pastures due to stalled upside. I'm often wrong and unfortunately cap my profits.

The reason? Not taking into account scaled economics and alls its benefits.

2.) Search for “Scale Economies Shared” Businesses
Scale economics shared are quite different from scaling operations. As the firm grows in size, scale savings are given back to the customer in the form of lower prices. The customer then reciprocates by purchasing more goods, which provides greater scale for the retailer who passes on the new savings as well. Yippee! This is why firms such as Costco enjoy sales per foot of retailing space four times greater than run-of-the-mill supermarkets. Scale economics shared incentivises customer reciprocation, and customer reciprocation is a force multiplier in business performance.

3.) Ignore the noise
“Information, like food, has a sell by date, after all, next quarter’s earnings are worthless after next quarter. And it is for this reason that the information weighed most heavily in thinking about a firm is that which has the longest shelf life, with the highest weighting going to information that is almost axiomatic or speaks to the DNA of the business.

4.) Selling winners too early is the biggest mistake you can make
“The biggest error an investor can make is the sale of a Microsoft in the early stages of the company’s growth. Mathematically this error is far greater than the equivalent sum invested in a firm that goes bankrupt. The industry tends to gloss over this fact, perhaps because opportunity costs go unrecorded in performance records.” 1000% percent gains are tough to come by day trading. You can do both as you can often get 400% APY doing day trading, but having investments really drive your net worth while you sleep.

5.) Focus on a company’s destination
“If we had our time again, I would hope not to be swayed by their (apparent) overbought technicals but weigh more heavily their "DNA" and scale economies."

I started trading in pursuit of finding these businesses sooner than others; however I lost sight of letting these runners run for short-term gains and while often handsome returns, I should have put those with scale economies into my investment portfolio and let run for years.

Stay tuned as we build more towards this view.

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