Book review: Zero to one by Peter Thiel

 This book is about start ups. And zero to one is used as adjective for creating something new from scratch and not incremental changes to existing things. Author of this book Peter Thiel was the founder of PayPal, he built a successful product, scaled it and sold it at a higher valuation. How he could do this and what principles worked for him ( and would work for everyone else) is recorded in this book. The team he had built for PayPal now is known as ‘PayPal Mafia’ and went on further to build successful companies like LinkedIn.

If you are fascinated with how to commercialise an idea, build a team, build a product and scale it to become profitable and a monopoly in its segment, you must read this book. Author not only built PayPal but now as an investor, he is completely immersed into startup world, so his ideas are market tested. There are multiple videos available on the web where this author discusses similar topics. But at the end you can’t avoid appreciating this author and ultimately buy this book and read cover to cover.

I felt I should have read this earlier which would have helped me improve my judgment on my investments and fare better. But it is never late and he has made me realise I cannot ignore the startup world and how they work and if possible participate in their growth story when time comes.

Investment framework

 The recent fall in stock market due to corona virus shock (and it's recovery thereafter) gave me an opportunity to build a portfolio. And it seems to be working well as it has produced handsome returns and is giving me confidence to earn my financial independence through my investments. As my strike rate or success rate in picking the right stock at right price and also deciding when to exit seems to be high,  I thought of documenting my investment framework in an one pager. Here it is. I believe in life long learning and making corrections on the go but at this interval this is the process I follow. This is not an investment advice but for the purpose of documenting my investment milestones and also to aid discussion with like minded.

Let me take through the steps.

1. First create a four blocker. With one axis on Risk being High & Low and another axis on Reward being High & Low.

2. Understand that risk has a price. See if it is already priced into book value or not. Similarly look for what can be sustainable Return on Equity. Then place the stocks on one of these four blocks.

Now let us see what we can avoid.  

a. Low Risk and Low Reward: For the stocks falling in this zone, it would not make sense to invest as returns would be equivalent to fixed deposits or bonds. Most commodity or PSU industry would fall here.

b. High Risk and Low Reward: The companies or sectors which are in a long term downtrend (sunset industry) would be here. Many of the oil & gas sector companies are in the risk of phasing out in the coming decades as industry is shifting towards clean energy which is becoming price competitive too.

c. High Risk and High Reward: Though stocks in this zone might continue to make money, why take higher risks? If you have already owned these stocks at a lower price, may be you will let them run. But this is not a fresh entry zone.

That leaves us only one zone to invest.

d. Low Risk and High Reward: Since markets are efficient in the long run, any stock falling in this zone is an opportunity as long it stays there and as the markets discover them and they would get pricier. Or your anticipation of business transformation does not work out right, you need exit quickly to stop your losses. 

Remember that this is not a one time exercise, you need to reassess when there is a bigger price movement and after every quarterly result and if there are any major announcements or developments in-between.