Knowing where the pipes are buried

17 February 2011 | 0 Comments

One of the tenets of investing is similar to what any company or sports team strategically attempts to do every day: find a competitive advantage.

In investing, an advantage can come in three forms: analytical, psychological or informational. Analytical advantages come from being able to analyze data better than others, which is very hard to get. Data availability and analytical sophistication has been pushed to a level that only PhD’s in Mathematics or Physics can explore the boundaries for an analytical advantage in public markets. Psychological advantages can come from being able to understand things like  herd mentalities or irrational behavior.  Living in a place like Omaha, Nebraska instead of New York City helps because one doesn’t play tennis every weekend with others in the industry. But again, it’s fairly difficult to obtain as it requires a knack for thinking differently, which goes against our better natures.

Informational advantages are the most interesting but are fairly straightforward: obtaining information that others don’t.  Sometimes this manifests itself in private information that legally can’t be acted upon (inside information like knowing sales numbers on certain products before earnings reports or knowing about an M&A bid before it’s public). Other times it’s perfectly legal and many investors just didn’t do the work to dig it up.  Private market investors can get the vaunted “proprietary” deal flow with specialized knowledge or a strong, trusted network. This can be a really difficult advantage to get, but oftentimes it’s the simplest.

I’m reminded of a story a friend told me:  She was involved with a horse stable in a park in San Francisco. A group of people would dedicate time to feeding and caring for the horses.  One day, they noticed a steady stream of water running just down the middle of the stable, originating from a nearby hillside. They figured the water was coming from a burst pipe so they contacted a number of plumbers to come out and fix the problem. A few came, looked at the problem and said they couldn’t help because they couldn’t locate the burst pipes, which were buried in the side of the hill.

Frustrated, a few enterprising volunteers attempted to locate the blueprints of the piping system… to no avail. Nobody seemed to know where they were. Finally, a long-time volunteer remembered that there was one particular plumber they always used for the area. They called him up and he came out, knew immediately where to find the pipe and fixed the problem.  When pressed on how he knew where the pipe was, he very openly told them his story.

Many years earlier, he came across the blueprints for the pipe system. Being the enterprising gent that he was, he snatched the plans and kept them. From that point forward, any problems experienced with those pipes, he was the only guy they could go to in order to fix them.  A nice competitive advantage. He could sit back and expect guaranteed business.

Want to succeed?  Know where the pipes are buried in your business and don’t tell anybody else.