I recently penned L.A. Stevens' four foundational investment frameworks which guide L.A. Stevens in deciding on which companies it will initiate and provide coverage.
Today, we will consider another foundational framework that informs the businesses L.A. Stevens covers.
This framework is what I call the "Inverse Bubbles" investment framework.
The Cycle Of Life And Death
If we assume a high-level view of the business world (investing is generally the act of purchasing the best businesses and holding them for the long run), we can scientifically determine where exceptional returns will spawn.
That is, every industry, every market, and every discipline in life cycles through:
- Productive Application
In the case of business, with each birth, new companies emerge that renew the industry in which they operate. Sometimes, they renew the industry to the extent that it becomes unrecognizable.
We can think of this as cells regenerating in a body, leading to a renewed body (industry) over the course of years or decades.
And, with each death, incumbent/old companies die, making room for the new to grow and flourish.
To believe that the business world exists in any other way would be akin to believing that the laws of nature do not exist. Everything, from an individual human or plant cell to our great empires to this very universe itself, will experience the cycle of life and death.
I capitalize on this process of life and death within the world of business by allocating capital in accordance with my "Inverse Bubbles" investing framework (this is term I coined so it's not worth Googling it, which I share to save you time and provide context).
An "Inverse Bubble" is an industry populated by the aforementioned incumbent/aging companies: stagnant cells that will be eliminated by new, more dynamic cells in the body (industry). These businesses are no longer dynamic and evolving, and they often possess technology or thought structures from bygone eras that make them fundamentally disadvantaged.
In the Inverse Bubble framework, a new entrant (new business) emerges, and, over time, with its dynamic, evolving, and technologically advanced product/platform, it eats away at the existing market (defined by total addressable market $), capturing market share via its differentiated, more desirable product.
Coupang Eating Away At Its "Inverse Bubble"
- It's "Inverse" Because Coupang's Value (Market Cap) Is Small Relative To The Industry/TAM In Which It's Growing; Therefore, Coupang Collapses The Bubble Into Itself By Consuming Market Share And, Commensurately, Expands As The Bubble's Collapses Into Coupang's Revenue And Profits.
- Conversely, in a regular bubble, Coupang's market cap would dwarf the industry in which it's consuming market share, making the entire situation an unsustainable bubble where the business' value is set to collapse down to the size of the actual market.
A fantastic example of this investing framework/dynamic was Walmart (WMT) in the 1970s. Walmart introduced a vertically integrated retail concept that used technology and economies of scale to create the cheapest, most convenient shopping experience available to consumers. It employed technology at giant scale to facilitate this inexpensive, convenient shopping experience.
The incumbents of the retail industry, e.g., mom and pop grocers or department stores like Sears, fundamentally could not compete with Walmart's new and differentiated offering. (In the interest of brevity, I won't go into "The Innovator's Dilemma," which is often the basis for why incumbents struggle to compete with new entrants during this cycle of life and death, but this is worth noting, and I will discuss it in the future with you.).
Over time, Walmart gradually consumed this trillion dollar+ total addressable market (grew within its Inverse Bubble), and, today, it generates hundreds of billions in annual sales, much of which it took from the incumbent/aging businesses that, in accordance with the laws of nature, were to inevitably die. It was all a matter of the cycle of life and death for the retail industry, just as the industrial revolution catalyzed the death of the Catholic Church's grip on government in Europe, ushering in our current 19th-20th century nation-state paradigm.
It was all a matter of the cycle of life and death, just as this cycle of life and death plays out ubiquitously in our universe.