Profit from Asymmetry

Dear friends,

Today, I'd like to delve into a fascinating topic - the concept of asymmetries in investing, a principle that extends well beyond the realm of finance and permeates various aspects of life, including business and personal finance.

As value investors, our craft revolves around identifying and capitalizing on asymmetries. Imagine spotting a company we understand, one that we've carefully valued, only to find that its market cap significantly undershoots our estimations. We might wonder, "Is there something amiss with the management or the competitive moat? Everything appears favorable". It's in moments like these that we encounter the asymmetry. Benjamin Graham's personification of the market, the whimsical "Mr. Market", has simply decided to undervalue this company. Our decision to capitalize on this discrepancy hinges on our understanding of the business and whether it falls within our circle of competence.

Now, let's consider how this concept of asymmetry applies to personal finance. One such example can be found in the realm of unsecured loans. Lenders often find themselves at an informational disadvantage, as they cannot foresee a borrower's bad luck, such as a job loss or an unexpected expense. They may review a borrower's credit history and income level but cannot anticipate every eventuality. To compensate for this asymmetry, the lender charges a risk premium​​.

The other example is when a buyer or seller in a financial transaction possesses more information about the past, present, or future performance of an investment. One party may be aware that the asset is underpriced, thereby creating an opportunity to profit at the expense of the other. This asymmetry can be beneficial or detrimental, depending on which side of the transaction you are on​.

In business, asymmetry is often inherent in the business model itself. Google and Facebook, for instance, operate on asymmetric models where the users and customers are two different entities. Users provide data that is refined and leveraged using technology, transforming it into a core asset that's sold to a key customer - the advertisers. The users, despite being the most valuable stakeholders, are not the ones directly monetized. Instead, the value they provide through their data is what gets monetized​.

Another example is Netflix's business model. Although Netflix's users and customers are the same people, the model is still asymmetric because the service indirectly monetizes the attention it captures. Netflix uses its users' data to refine and improve its services, enhancing the user experience and ensuring that subscribers remain loyal and engaged​.

In conclusion, asymmetries are omnipresent, not just in the world of investing, but also in personal finance and business. Recognizing and understanding these asymmetries can arm us with valuable insights, allowing us to make more informed decisions and potentially yielding significant benefits. As we continue our journey in value investing, let's remember to keep an eye out for these asymmetries and use them to our advantage.

Until next time!