Saturday Serendipity

Quote, Mental Model, Interesting find

Samvit Patel

Feb 17, 2024

Reading time: About 6 minutes

Quote

“Your failures serve as a beautiful reminder that you were in the arena trying.” - Shane Parrish of Farnam Street

Mental Model

Scarcity

How many times have you wanted your favourite pair of Jordans but could not get it because they are out of stock, or they are so rare that the price of the sneakers have skyrocketed to a point where it makes no sense to even wear it anywhere.

In my case it has never happened, but that is probably because I am an Air Force guy (plain and boring).

For the many people who do suffer through this actually want it even more as the sneaker is ‘scarce’. It is very hard to get and if I get it I will be one of the few people who has it.

This mental model is the opposite of availability.

Availability vs Scarcity

Now if you look at shoes or fashion in general there are a lot of big brands which are there everywhere. For instance brands like Zara and H&M are big companies which make a lot of money and at the same time they are available everywhere and everyone can buy it for affordable prices.

On the other hand you have brands like Gucci and Louis Vuitton which are extremely expensive and on top of that they keep limited stock and release a lot of stuff which is ‘limited stock’.

Both set of companies even though they use different strategies make a lot of money. As Rory Sutherland says the opposite of a good idea can be a good idea.

Speaking about companies which use the scarcity business model you can’t write about it unless you mention Ferrari.

Every kid dreams of buying a Ferrari. The fandom of the company is really unique and a little crazy some would say. Here’s a story Mr Mohnish Pabrai told us at Flame University,

He bought a Ferrari after waiting for 4 months (after knowing and getting help from the chairman of Ferrari as the normal waiting time is 2-3 years) He got to know how the rich are crazy after Ferrari.

“Men only have a few ways to show wealth”

When he was going to take the delivery of the car the dealer offered Mr Pabrai 100,000 to not take delivery. Mr Pabrai was in shock. He wanted to know what the dealers side of the story (motive) was. So he asked him.

The dealer replied,

There are people who want the car who have to wait for 2-3 years who are willing to pay a lot of money to get the car earlier.

He was taken care of as 100,000 was only a small part of the money he was getting. Mr Pabrai still chose the car as he wanted the Ferrari.

Ferrari monza a car worth 2.5 million open only to people who have 20 Ferraris or more already. Only 300 models. It’s a one seater car (so you can’t even take a girl out).

A friend of Mr Pabrai approaches him. He asks him to do a favour and speak to the chairman to get the monza for him. Mr Pabrai asks him do you have 20 Ferraris?

He says no.

Mr Pabrai asks him why don’t you just buy it in the after market?

He says that nobody who buys a monza is willing to sell it. They’re not buying it to sell.

Mr Pabrai is still hesitant, he asks him is it legal to drive in America?

He responds no.

So Mr Pabrai asks him how would he drive?

He responded, after I buy the car Ferrari will keep it in Italy and ship it to a racetrack so I can drive it for a day around the racetrack and then they’ll take it back. And for all of this I would have to pay approx $6000. So the car costs 2.5 million dollars and every time you want to drive the car you have to pay around $6000.

Mr Pabrai is confused as to why a person would pay so much for a car they can’t keep in their garage and only drive once a year that too after paying a lot of money.

To this his response is you won’t understand.

He told him if the car does go in the after market it sells for about 5 and a half million. So he makes double the money.

Mr Pabrai assumed that’s the reason he wanted a monza.

You can see the video here:

“If an item is rare or becoming rare, it is viewed as more valuable.When a desirable item is rare or unavailable, consumers no longer base its fair price on perceived quality; instead, they base it on the item’s scarcity.” - Prof. Bakshi

A home vacuum-cleaner operation I infiltrated instructed its sales trainees to claim, “I have so many other people to see that I have the time to visit a family only once. It’s company policy that even if you decide later that you want this machine, I can’t come back and sell it to you.” …As the company sales manager impressed on his trainees, the true purpose of the can’t-come-back claim has nothing to do with reducing overburdened sales schedules. It is to “keep the prospects from taking the time to think the deal over by scaring them into believing they can’t have it later, which makes them want it now.”- Robert Cialdini

In Investing

The most hot market right now in my opinion is the IPO market. Everyone wants to get allotment in IPO’s because most of them which are getting listed are making huge gains.

Getting allotment in IPO’s is hard as most of the times companies are over subscribed. Since most people don’t get allotment we perceive the values of IPO’s to be higher than it actually is. Remember Tata Technologies IPO? Everyone wanted a piece of that.

When Buffett issued Class-B shares of Berkshire, he made sure that it wasn’t a typical IPO. He wrote in his 1997 letter…

Our issuance of the B shares not only arrested the sale of the trusts, but provided a low-cost way for people to invest in Berkshire if they still wished to after hearing the warnings we issued. To blunt the enthusiasm that brokers normally have for pushing new issues—because that’s where the money is—we arranged for our offering to carry a commission of only 1½%, the lowest payoff that we have ever seen in common stock underwriting. Additionally, we made the amount of the offering open-ended, thereby repelling the typical IPO buyer who looks for a short-term price spurt arising from a combination of hype and scarcity.

More companies should emulate Berkshire Hathaway.

Scarcity works to our benefit as well if you look at it in terms of being right. When the market is acting irrational and the common sentiment is very high than rationality is scarce. Hence as a Value Investor it is your duty to be rational when others are not.