No, this isn’t a post about how to get rich quick — if you’ve been a reader of the rest of this blog you’ll know I’m very much interested in exploring the mental models of great investors by unpacking how they make their investing decisions for long term compounding.
Besides deep dives into business models and what constitutes a quality business, there’s also something to be said about the approach to it once you’ve done your market research and understood the business economics.
One of the tenets that Mr. Warren Buffett follows (but doesn’t talk about too often) is about capturing the economics of an entire industry. Provided that that industry is above average.
Case in point is Mr. Buffett’s decision to buy all or most of the major large airline companies in the US. After having observed that the economics of that industry has changed, he then decided to make a bet on the entire industry. It seems rationale to do so because (at the time anyway) the airlines have achieved some level of industry consolidation that levelled out the “feast and famine” characteristics that plagued the industry for most of the 20th century. For reasons well known now, the pandemic threw the biggest possible wrench in that investing thesis but the investing heuristic is a sound and rationale one; investing in a better than average industry and capturing it with a whole-of-market approach.
It’s also stands to reason that while no one can predict with accuracy that any one airline can win marketshare over others in what is otherwise an industry with commodity-like economics, it makes sense to place bets on the entire industry providing services to participate in the general upward demand for air travel. I’ve always found that most people overlook this way of thinking and it’s fascinating that this is not more widely talked about amongst investing circles.
Lately, I’ve been interested in Micron Technology. Firstly, the semiconductor industry has now become front-page news with shortages impacting production from cars to phones. But more importantly, I’ve been eyeing this company because Li Lu from Himalaya Capital (Charlie Munger’s protégé) had invested a few years ago and many others have followed suit. While their large investment piqued my interest to learn about Micron as a company, it’s far more interesting to look at it from an industry perspective, where demand potentially has become a step-function because of ubiquitous need for semiconductors everywhere.
Most investors might think about copy-catting Li Lu; I have for sure. But with respect to his investment in Micron, I believe (though I do not have any evidence of this) that Li Lu, through his investment funds, is investing in the industry as a whole rather than just Micron. The other players in this monopolistic industry in DRAM memory chips are both public companies: Samsung and SK hynix.
And that’s the play right there; with global customers, mission-critical embedded components for almost every advanced products, monopolistic but not too heavily regulated. Though DRAM chips are effective commodities subject to market forces, there aren’t many companies and public-partnerships that can support the (continued) investment required to stay ahead of the needs of this fast-moving industry.
There is a lot of talk about the technology, about the limits to the physics of building near-atomic components, the enormous capital costs to building these manufacturing plants, equipment bottlenecks (in the case of ASML) the semi-conductor shortages itself, the geopolitical and strategic importance of these components, etc., I believe it’s lost on most investors that while Micron is a great business on its own, the industry is even better.
Disclaimer: I do not own shares in Micron, Samsung or SK hynix and don’t intend to in the near future. You should do your own research and make your own investing decisions.