Saturday Serendipity
Quote, Mental Model, Interesting find.
Hi.
Reading time: About 7 minutes
Quote
“I think that one should recognise reality even when one doesn’t like it; indeed, especially when one doesn’t like it.”- Charlie Munger
Mental Model
Alloys
An alloy is nothing but a simple sheet of metal to a lot of us. Hopefully, after reading this you don’t think about alloys as simply a sheet of metal.
“An alloy is a metal that’s combined with other substances to create a new metal with superior properties. For example, the alloy may be stronger, harder, tougher, or more malleable than the original metal. Alloys are often thought to be a mixture of two or more metals. However, this is a misconception, as alloys can be composed of one metal and other non-metallic elements.
The predominant metal in the alloy is called the base metal. The other metals or elements added to the alloy are called alloying elements.” - Eoncat
Steel, Stainless Steel, Aluminium, etc are all alloys that are created by mixing two elements by melting them and then solidifying them.
You’re probably thinking what is the point of me going on about alloys? There is no value to most people about this.
Let me ask you a simple question,
What is 2+2?
You’re probably going to say 4.
Well here’s the interesting thing about alloys. Sometimes the sum of two things does not equate to the sum of the two parts. It is more.
So 2+2 can be 6.
To put it simply if you were to take two elements separately Iron and Zinc. If you take these elements and combine them by melting them here’s what happens: the atoms of the constituent metals are arranged in a new lattice structure that is different from those of the pure metals. So the two atomic structures fuse forming something entirely different. The zinc layer can for instance sacrifice it to protect the iron.
Now if I were to apply this to different fields this is my major takeaway: When you have the right mixture 2+2 can be = 6.
In Sport
This is more applicable to team sports but even individual sports have a team effort so you can relate it to all sports. Think about the best teams in the world. You can take those players out individually and put them in different teams the chances of you getting the same outcome as you did with that team are very rare or rather close to impossible.
In 2021 Chelsea won the Uefa Champions League. They were facing Manchester City. Arguably the best football team in the world in the last few years. This same team was performing under Frank Lampard like they would not be competing for any trophy. There were no hopes. They ended up defeating Real Madrid, Atletico Madrid and other big teams to become Champions of Europe.
But these players if you look at this particular team in that particular year then and then only would you consider it great. Out of the 11 in the picture, there are only three players in the team right now. All of them left or were sold. These players if you look at them individually now have become worse than they were in 2021. I don’t know the reason to be honest. But the players in the picture did not add up to an 11 which should win the Champions League. The team combined with the right coaching staff and the right motivation is what won it in my opinion. It’s something that cannot be explained. The players performed their best in that season in UCL under their manager Tuchel. The changes after that even the smallest ones like a change in the support staff could have been the reason for Chelsea to now be 9th in the table. As we saw in the last post a small thing leads to another. Putin going to war with Ukraine ended up getting Chelsea from a great team that won the UCL to a team that dreams of getting back into Europe.
In Sports individual players might not add up to be title-winning, or sometimes they might end up adding up to be the favorites but the way that a team operates and synergies like an alloy helps them win the tournament. This is my main takeaway. You can come up with the best individuals in the sport and I can come up with people who gel together, a great coach, people who combine to make each other better, and then the results follow.
In Investing
Charlie Munger is very vocal about the fact that great opportunities only come around once in a while. So the game according to him is opportunity meeting the prepared mind. Let’s look into Costco.
Costco is a wholesale retailer. They have shops of sizes which cannot be imagined. Why were they successful?
They have a very unique culture. They have an obsession with low cost. They buy goods in bulk and they pay quicker which means they get it for cheaper. Now as a businessman, you would of course want higher margins. So you would keep the price the same and reduce the cost or increase the price as you have loyal customers.
They do the opposite. If they get any sort of good for cheaper they pass that down to the consumer.
“Costco will continue making huge contributions to society. It has a frantic desire to serve customers a little better every year. When other companies find ways to save money, they turn it into profit. Sinegal passes it on to customers. It's almost a religious duty. He's sacrificing short-term profits for long-term success. More of you should look at Costco.” Charlie Munger
I think this is a fake quote I am not sure, but I can’t lie it does align with the culture at Costco and their obsession with low prices,
“You could raise the price of, say, a bottle of ketchup to $1.03 instead of $1, and no one would know. Raising prices just 3% per product would add 50% to your pretax income. Why not do it? It’s like heroin: You do a little and you want a little bit more. Raising prices is the easy way.” - Jim Sinegal ( Cofounder of Costco)
So are they successful because they are obsessed with low cost?
Partly, yes.
They also charge a membership fee. This form of revenue is pure profit. Adding a membership which costs money makes the store more special for the consumers. Costco provides a win-win situation. They charge a membership fee so that they can make some money and they sell goods to consumers for cheap.
Company culture is focused on creating value for all stakeholders in the long term and they are willing to forego short-term gains for that. This is a good sign of the culture.
They also ensure that the quality of the goods that they sell is top quality.
“We make sure the merchandise we offer is top quality. We do not offer unpopular lines of goods, seconds, or out-of-season stock. Our refund policy is that when customers bring something back, they get their money right up at the front register—no red tape...you can do very well in the retail business without...spending a lot of money on advertising.”
- Sol Price (associated with Price Club which merged into Costco)
They also buy goods in bulk sizes. So one small thing you notice is the fact that since all the items inside Costco are bigger in quantity the customers need a bigger shopping cart. These bulk products provide Costco with higher revenue and at the same time end up being a great deal for consumers as well as they last longer. A big problem among a lot of retail stores is the crime. Many people steal but since the goods are bigger it becomes harder to steal.
How do they treat their employees?
“In order to reward the shareholder in the long term, you have to please your customers and workers...You've got to want to get the very best people that you can and you want to be able to keep them and provide some job security for them. That's not just altruism. In the final analysis, it's good business ”
- Jim Sinegal, former CEO
To recap Costco is a low-cost operator, has pricing power with its membership, has an amazing culture, has a long-term mindset, etc. Costco has a lot of elements that are contributing to its success not only one.
We see many businesses with these qualities. But it is very rare to have all of them. I didn’t even get into the behavioral edges that they have. This was mostly just the culture. Costco has the right synergy.
Alloys mean the right people in the business which combine with the right culture and values and produce returns that cannot be expected. In these companies, growth might not be 2+2=4.
Interesting find
Anti-Aging Tips From Blackjack and Finance Guru Ed Thorp
That’s it.
Thank you for reading.