I made my first substantial money investing in tech. Books like «Zero to One» is a book that was referenced a lot for investing in the tech sector and I really respect Peter Thiel as a thinker. I have found this book can also be applied to commodity investing. One can take knowledge from one place and try it in other sectors.
From my experience the biggest change in valuation a company can have is going from the impossible to the possible. A company that is able to get into production, come successfully out of a restructuring, or strikes gold are events I would put in this category. Things that are already seen as possible for a company will already have a lot of this priced in. Unanswered questions, or impossible situations are not priced in, and people do not know what it is worth.
In Zero to One there are three ways of approaching this:
1. Bet on a contrarian truth
What important truth do very few people agree with you on? Here you have to take a step outside the mainstream consensus. Some examples I have for this in the commodity sector are:
- Renewables like solar and wind can’t save the environment alone. We need reliable baseload power. The solution for this is in many cases nuclear.
- The electronics industry is experiencing a chip shortage because of increased electronics demand. The tin shortage is the bigger factor, and not production capabilities in the factories that the mainstream media portrays it as.
By betting contrarian here in smaller sectors, one avoids competing one will experience in bigger, more popular sectors.
An important factor to make sure you are correct here is: Is it the right time? If you have seen “2001 a Space Odyssey” they have a version of an iPad in the movie. The movie is from 1968, more than 40 years before the technology and the market was ready for such a thing. You would not want to wait that long for something to materialize.
2. Start by dominating a small market
The book here gives an example of Amazon that started in a small niche market, selling books. They used this as their launching pad for getting into other sectors later.
Also here you can apply this to the commodities market. You will have a better chance with over performing in a niche market like tin, tungsten or uranium than iron ore or coal. But as for every rule there are exceptions. For example, after the big fall in the oil price after 2014, a lot of the workforce had to leave the sector. After investment interest went down in the sector, competition among investors to find the best investments also went down.
3. Strive to be a monopoly
This point is about how you should not compete against other companies. You should be without competition as much as possible. By doing this you prevent the competition from eating away your profits. By doing this companies like Google can focus on improving, and creating new features which the customers will get advantage from.
I do not apply this to the companies by themselves, but more the sector by itself when it comes to commodities investing. The sector has to be the only solution for their customers. There should not be an easy substitute for them.
The uranium sector is the only source of fuel for the nuclear plants. There is no substitute for uranium to keeping them running. That is why, when the circumstances are right, the price utilities have to pay does not matter.
If you want to solder circuit boards you need tin. Tin is the glue metal. Before you could use lead for soldering, but due to regulatory requirements, plus the health and environmental benefits, tin is the only real alternative now.
This is something one must try to do with more than this example. From every aspect of your life you might have something you can transfer to another situation. From football you might have to learn to keep cool under pressure, from long distance running you might learn patience and perseverance. All things you can transfer to the rest of your life and maybe to investing. A lot of great things can happen if you go from zero to one.