PDF Summary:Where the Money Is, by Adam Seessel

Where the Money Is by Adam Seessel presents an innovative approach to value investing, known as "Value 3.0," that adapts the enduring principles of value investing to the modern digital economy. Seessel argues that the rise of technology companies with fundamentally different business models necessitates a transformation in how investors identify value and assess future growth potential.

He outlines strategies for zeroing in on companies positioned for exponential growth by harnessing technological advantages like network effects and low capital requirements. Seessel also provides perspectives on evaluating leadership and adjusting traditional valuation methods to account for rapid expansion in revenue and profitability.

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Assessing the quality of leadership in a world that is being transformed by the progress of digital technology.

Seessel formulates a pioneering approach for value investing tailored to the digital economy's opportunities and challenges, which he refers to as a new iteration of value investing. The methodology, often referred to as Value 3.0, consistently strengthens its core through a dedicated adherence to thorough and detailed analysis. The approach that focuses on pinpointing businesses with a competitive advantage and prospects for swift growth is known as Value 3.0. Seessel underscores the necessity of identifying distinctive traits within companies and champions a thorough assessment of the management team's quality.

Identifying companies that possess a small portion of swiftly growing, important markets and sustain lasting advantages over their competitors.

Adam Seessel's approach to identifying standout firms involves seeking out businesses that capture a small slice of a swiftly growing market while maintaining a unique edge over their rivals.

Determining the initial pair of factors presents little challenge. Seessel advises placing capital in companies with less than a 10% market share, indicating significant potential for growth in the future. Fortunately, such data is frequently accessible through the firm's online portal or in the formal filings with the government body responsible for regulating securities exchanges. Seessel points out several examples, such as Intuit's disclosure on its investor relations webpage that QuickBooks is utilized by 5 million subscribers online, in a global market with a potential of 800 million users. The author's market analysis revealed that Amazon commands approximately 5% of the entire retail market in North America.

Determining the third factor is more complex: Does the business hold a sustainable advantage over its competitors? Evaluating the distinct edge a company has over its competitors demands insight, as Seessel notes, and cannot be determined by data analysis alone. The beneficial factor is that often, choices in this field are generally the outcome of using sound discretion, guided by an organized method for guidance. Seessel outlines various competitive strengths that can assist investors in pinpointing attractive investment prospects.

Dominant platforms maintain their market superiority by utilizing the strength of network effects and the expenses related to changing services.

Seessel underscores the two essential elements that confer upon technology firms their distinct advantage within the market. As the user base for a product expands, each user finds the product more valuable due to the phenomenon often referred to as the amplification of utility through interconnected user engagement. The author exemplifies this trend by referencing instances such as Venmo and the colossal home-sharing enterprise Airbnb, showing how a growing user base on a social platform attracts more potential connections, thereby encouraging an increasing number of people to join. Seessel characterizes this growth as a continuous loop where the broadening of the user community boosts the attractiveness of the platform, which in turn draws in more users. This edge, Seessel explains, means that digital businesses, unlike most old-economy consumer-facing businesses, are “winner take all.”

Tech firms frequently achieve a substantial market advantage by leveraging "switching costs," which are considered an evolution from the foundational principle of interconnected user benefits. Consumers face certain expenses when they shift their allegiance from one product to another in a competitive market, which is what is meant by "switching costs." Such costs can be both tangible and intangible. The pervasive use of Microsoft's Word is so ingrained that any shift away from it would lead to considerable upheaval. The widespread reliance on Google's free search services, along with its solid performance, reinforces the resilience of its business model. Why switch?

Context

• Network effects can lead to market monopolies or oligopolies, as the first company to achieve a critical mass of users can dominate the market, making it difficult for new entrants to compete.
• The infrastructure supporting network effects often includes robust data management and analytics capabilities, which help platforms optimize user experience and engagement.
• Users may feel a sense of belonging or fear of missing out (FOMO) when their peers are active on a platform, further driving user growth and engagement.
• The process creates a feedback loop where increased user engagement leads to more data and insights, allowing the platform to improve its services and attract even more users.
• Established digital platforms often enjoy strong brand recognition and consumer trust, making it challenging for new entrants to persuade users to switch.
• Regulators may scrutinize high switching costs as they can lead to monopolistic practices, reducing consumer choice and innovation in the market.
• In the tech industry, switching costs often involve data migration challenges, compatibility issues, and the need to retrain staff or users on new software.
• Consumers may experience stress or discomfort when adapting to a new product, which can deter them from switching. Familiarity with a current product often leads to a preference for maintaining the status quo.
• Users are typically familiar with Word's interface and features due to its long-standing presence in the market. Transitioning to a new software requires time and effort to learn new functionalities, which can be a deterrent.
• Over the years, Google has built a strong brand reputation for reliability and innovation, which contributes to user loyalty and market resilience.

Seizing opportunities swiftly or engaging with the tech sector right from the start.

Seessel explains that in the technology sector, known for its constant advancement, pioneering a market is particularly potent as a strategy for establishing a dominant position. Merely arriving ahead of others does not suffice, he explains. Companies that rapidly rise to the top of their sector achieve this by using their early lead to create further strengths, including obstacles to customer defection, the benefits of a large number of users, or achieving the lowest operating costs in their industry.

Practical Tips

• You can identify emerging technological trends by regularly browsing patent filings and academic journals. By keeping an eye on the latest patents and research papers, you'll gain insight into what technologies are on the horizon. For example, if you notice an uptick in patents related to augmented reality, this could signal a ripe opportunity to explore AR applications in industries that haven't yet adopted this technology extensively, like education or healthcare.
• Develop a habit of continuous learning to stay ahead in your field. Instead of resting on your laurels after achieving a goal, identify online courses or local workshops that can expand your expertise. For instance, if you've just been promoted to a managerial position, you might take a course on emotional intelligence to better lead your team.
• Create a personal feedback loop by asking friends, family, or colleagues for input on your recent successes and how you might build on them. Use this feedback to set specific, actionable goals for yourself. For example, if you've been praised for your leadership in a volunteer group, you might set a goal to take on a bigger project or to mentor someone else to develop their leadership skills.
• Develop a referral program that gives current customers a reason to bring in new users. Provide a unique referral code to each customer, and when they share this code with friends or family who make a purchase, both the referrer and the new customer receive a benefit, such as a discount or a free item. This strategy leverages your existing customer base to grow your user numbers organically.

Assessing management groups that demonstrate ownership mentality rather than merely performing as employees.

Seessel emphasizes the necessity to thoroughly evaluate the impact and efficacy of the leadership team, irrespective of the company's prospects. Adam Seessel is of the strong opinion that the finest leaders are those who adopt the attitude and actions characteristic of someone with a personal stake in the company, even if they do not hold any actual shares. Adam Seessel emphasizes Tom Murphy's exceptional stewardship of the media giant Capital Cities/ABC, as well as the Mendelson family's governance at HEICO. All three, he says, exhibited a deeply ingrained thriftiness while managing their individual enterprises. These executives put the interests of shareholders ahead of their own self-interest.

Understanding the factors that drive the continuous generation of shareholder value, rather than focusing solely on short-term financial profits.

Exceptional CEOs, Seessel argues, should have a connection with the companies they oversee that transcends simple emotional investment. They must grasp the intricate processes that result in the steady accumulation of wealth as time progresses. He advises that company leaders should prioritize the effectiveness of generating profits relative to the capital deployed. Unfortunately, Seessel observes that a majority of company leaders either neglect this principle or deliberately prioritize less significant measures.

Practical Tips

• Engage with investor relations sections on corporate websites to study real-world applications of shareholder value creation. By reviewing annual reports, investor presentations, and earnings call transcripts, you'll see how CEOs communicate their strategies for driving shareholder value. Take notes on recurring themes or strategies that seem to resonate with investors and analysts, and consider how these approaches could be applied in various business scenarios.
• Engage in a monthly 'profit brainstorming' session with yourself. Dedicate time to come up with new ways to increase your income streams or reduce unnecessary expenses. This could involve researching passive income opportunities, negotiating bills, or finding more cost-effective alternatives for services and products you regularly use.

Aligning executive incentives and compensation with the interests of outside investors.

Prior to allocating our personal capital, Seessel recommends a detailed examination of how company executives manage the organization's assets. Does management use borrowed money to buy other companies, leaving the shareholders to clean up the resulting debt mess? Are company leaders diminishing the worth of their investors' holdings by granting themselves significant monetary bonuses, stock options, or other forms of equity participation?

Practical Tips

• Develop a habit of analyzing financial news with a critical eye by setting aside time each week to read articles on corporate acquisitions and the use of debt in these transactions. This will help you understand the real-world implications of leveraging debt in business and develop your own informed opinions on the matter.
• Start a discussion group with fellow investors to share insights and strategies on how to approach companies with excessive executive compensation. By pooling your knowledge and resources, you can develop a collective response, such as drafting a letter to the company's board or collaborating on a shareholder resolution to address the issue.

Methods for assessing the worth of both modern, tech-centric firms and established, conventional enterprises.

Seessel makes a strong argument for updating conventional strategies of value investing, especially when evaluating the correlation between the cost incurred and the actual value received in today's digital age.

Traditional valuation metrics such as P/E ratios often do not reflect the actual growth prospects of swiftly growing companies with minimal physical assets in the technology industry.

Seessel argues that the conventional benchmarks for evaluating value investing, such as the price-to-earnings ratio, do not adequately capture the value created by technology companies. In this period of transformation and innovation, we must adapt our methods of utilizing the price-to-earnings ratio to ensure it remains an effective tool.

Discrepancies in the financial disclosures that obscure the true earnings of tech companies.

Seessel argues that the focus should be on a company's capacity to generate future profits rather than just its reported earnings when assessing the price-to-earnings ratio of a company in the modern economy. Because today’s companies reinvest so much in areas like research and development, and because GAAP requires most of these expenditures to be expensed, the current income statements of companies like Amazon and Alphabet are artificially depressed. To address this imbalance, the approach evaluates the potential profits of a technology firm if it operated within the confines of a conventional business model, without any anticipation of growth.

Practical Tips

• Create a simple spreadsheet to track your monthly expenses, distinguishing between 'expensed' items and 'investment' items. By doing this, you'll gain a clearer picture of where your money goes and how it contributes to your future financial health. For example, a gym membership might be seen as an investment in your health, potentially reducing future healthcare costs.
• Develop a habit of evaluating new gadgets or subscriptions you're considering by calculating their value without added features or services. Before making a purchase, write down the core functionality of the product and estimate how much you would pay for just those features. This helps you avoid being swayed by potential upgrades or add-ons and ensures you're investing in technology that offers true value in its basic form.

Assessing the long-term profitability potential of a company through adjustments to its reported financial statements.

Assessing the prospects for financial gain necessitates a two-step process. Adam Seessel initiates his analysis by projecting a firm's prospective earnings. He avoids making predictions about the distant economic conditions, acknowledging the impossibility of accurately foreseeing such remote eventualities. Anticipating that a selection of firms will continue to grow due to their dominant market positions and inherent strengths is reasonable, with forecasts indicating their advancement will persist well into the future.

Next, Seessel ingeniously adjusts the company's financial statistics, incorporating hypothetical numbers reflective of the company's potential performance at full maturity into their declared profit margins. He avoids a total overhaul of Generally Accepted Accounting Principles (GAAP) or the strict use of external accounting techniques, choosing a method that deviates from Stewart's approach to assessing economic value. He relies on his personal discernment. In his examination of Amazon, Seessel adjusted the reported operating margins for this division, initially stated as 2%, to reflect a more ambitious 10% margin that is consistent with Amazon's long-term operating margin goals of 10% to 13%, and also considered the profit trends of comparable online retail companies.

Practical Tips

• Engage with a community of like-minded individuals interested in personal finance through online forums or local meetups. Share insights and methods for uncovering the true costs and benefits of common financial decisions, such as buying versus leasing a car or choosing between different insurance policies. By pooling knowledge and experiences, you can develop a collective understanding of how to assess financial choices more accurately, mirroring the process of evaluating a company's profitability.
• Engage in a monthly "financial experimentation" where you adjust one variable in your earnings or spending and observe the outcome. For example, if you freelance, you might try increasing your rates slightly or if you run a small business, you might offer a new temporary service. Monitor the impact this has on your monthly earnings to understand better how small changes can affect your financial situation without relying on broader economic conditions.
• Create a personal blog or social media content that focuses on industry leaders and their growth strategies. Share your insights on why these companies are successful, what they're doing right, and how others can learn from their strategies. This can help you build a network of like-minded individuals, improve your understanding of market dynamics, and position yourself as a thought leader in the space.
• Develop a "maturity model" for your personal skills or hobbies by envisioning the highest level of mastery you could achieve. Outline the steps and milestones needed to reach that level, including resources, time investment, and intermediate skills to acquire. This model can serve as a roadmap for your personal development and help you set realistic timelines for achieving your goals.
• You can evaluate your personal investments by creating a two-column comparison chart. In one column, list the factors you currently consider when assessing the economic value of an investment, similar to Stewart's approach. In the second column, list potential adjustments or alternative factors that might affect the value, inspired by Seessel's method. This side-by-side comparison can help you identify gaps in your current evaluation process and consider new angles for assessing value.
• Develop a habit of reflective journaling after making significant financial decisions. Write down the reasons behind your choices, focusing on the personal insights that guided you rather than just the numbers. Over time, you'll create a record that can help you understand your decision-making patterns and refine your discernment skills. For instance, if you chose to invest in a particular stock, note down not just the financial indicators but also your personal confidence in the company's vision and leadership.
• Create a personal financial plan by setting long-term goals and adjusting your current budget to align with those goals. If your goal is to save for a down payment on a house in five years, calculate how much you need to save each month and adjust your current spending to meet this target. This might involve cutting non-essential expenses or finding ways to increase your income.

Exploring businesses that lack a technological focus but have distinctive advantages and growth prospects.

Seessel acknowledges that although his focus is on companies propelled by technology, his portfolio also encompasses a diverse array of traditional businesses which he identifies as outstanding investment prospects. These businesses, although not primarily focused on software, continue to benefit from favorable market trends often seen in the tech industry: they possess a small share of a rapidly growing market, strengthened by strong market positioning.

Sherwin-Williams has built a substantial retail infrastructure that functions as a formidable barrier.

Seessel emphasizes the commanding presence of Sherwin-Williams within the paint industry, noting its array of products that demonstrate significant resilience to technological changes. Robots' inability to paint walls ensures the continued demand for diverse types of coatings. Sherwin-Williams distinguishes itself with a broad network of retail stores that are under its ownership and direct management. Like a convenience store, these stores will naturally withstand Amazon’s encroachment.

Other Perspectives

• Environmental and regulatory changes could impact the paint industry, potentially requiring significant changes to the product lineup that a substantial retail infrastructure alone may not be able to address.
• Technological changes in adjacent industries or in the production of raw materials could indirectly affect the company's products, challenging their resilience.
• The statement underestimates the potential for innovation in robotics and related fields, which could lead to breakthroughs that make robot painters a practical and cost-effective solution.
• A broad network of stores may struggle to maintain consistency in customer experience and store performance, potentially affecting brand perception negatively.
• The rise of online color matching tools and augmented reality apps could enhance the online paint shopping experience, making Amazon and other online retailers more formidable competitors.

Equifax thrives in the era of digitalization by implementing a strategy focused on data utilization.

Equifax, a company specializing in credit reporting, aligns with the investment excellence standards identified by Seessel. Equifax, already reaping the advantages of the network effect associated with data in the technology sector, has committed to adopting new technological innovations to improve its services and business processes. Investing now may initially reduce profits, yet it is expected to yield a more profitable and enduring enterprise over the long haul.

Practical Tips

• You can enhance your personal data security by conducting a monthly digital hygiene check-up. Start by reviewing your online accounts and their privacy settings, ensuring that you're only sharing necessary information. For example, go through your social media profiles and check what's visible to the public, then adjust the settings to limit exposure of personal data.
• Improve your financial literacy by enrolling in an online course focused on investment principles. Look for courses that cover topics like risk management, portfolio diversification, and market analysis, which are likely components of investment excellence. This knowledge will help you make more informed decisions aligned with high standards.
• Start a data-sharing initiative with friends or family to collectively benefit from shared insights. This could be as simple as creating a shared document where you all input your favorite cost-saving tips, recipes, or workout plans. Over time, as more people contribute, the value of the shared document increases, helping everyone involved to save money, eat better, or stay fit.
• Consider automating your home to save energy and streamline tasks, reflecting the idea of using technology to improve processes. Start with smart thermostats and lights that adjust based on your schedule and preferences, which can reduce your energy bills and add convenience to your daily life. For instance, a smart thermostat can learn your routine and adjust the temperature for when you're home or away, and smart lights can be programmed to turn off automatically when you leave a room.
• Volunteer to manage a budget for a local non-profit organization or community project. This hands-on experience will teach you how to allocate funds effectively, with an emphasis on investments that may not show immediate benefits but are crucial for the long-term sustainability of the project. Through this, you'll gain insight into practical budgeting and investment decisions that prioritize long-term success over short-term gains.