This week we read a blog post by Sam Altman, an investor and entrepreneur - currently CEO of research company OpenAI.
The blog post is called “The Only Way to Grow Huge”, and describes the one thing all businesses need to grow huge - in other words, generate more revenues.
It says that companies grow huge only if “people recommend the product or service to other people”.
The company’s offering needs to be of such high quality that its customers want to recommend it to their friends.
Altman’s post made us think about the businesses we come across day-to-day.
For example, as we walk down our local high street, passing the various storefronts, we could ask ourselves: “would I recommend this company’s product or offering to someone else?”
Looking back at one of our recent investment picks, Fever-Tree, this approach gave us an indicator that it would be a great business, before we’d even analysed its financials.
Simple yet Effective
Quite often analyses can be complicated. Researchers may use niche metrics and concepts to explain why a company is great, without first asking if they would use the product or service themselves.
Altman’s blog nicely cuts down the identification of a quality business by asking a simple screener question:
“Would you recommend this product or service to other people?”
It is a deceptively simple assessment, but that is where the power lies.
However, it's not a silver bullet.
People's recommendations can be subject to bias.
For example, you could prefer one company to another simply because you like the look of their logo, or because the salesperson was nice to you.
These factors don't necessarily mean that a company’s product is superior to its competitor’s.
You may have guessed by now, we like to look at this through a value investing lens.
We love the idea of finding a business around a product or service that we ourselves would recommend, because it overlaps with Warren Buffett’s ideas of finding a quality business that has some competitive edge or moat.
Advocating for one product over another sounds a lot like a competitive moat.
Let’s be clear, though.
We’d need more than a quality product or service to invest in a business.
After all, the financials and valuation could paint a different picture.
We believe that combining a quality product/service, with strong financials and an attractive valuation, increases our chances of making a good investment.
To Wrap Up
As an initial screener, we like the simplicity of asking if the product/service is so good we'd recommend it.
One should however be aware that this is not a silver bullet.
We like to also consider the financials and valuation to get a well-rounded view.
But we think Altman’s message is one worth remembering, if you want to succeed as an investor.
All the best,
Lars and Roshni