“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
–Winston Churchill
In one of my previous posts, “Why the Successful Know That Luck Takes Practice,” I noted that luck is a skill. It turns out that this skill is a byproduct of being observant and positive.
However, having that skill is only the first step. To winnow down potential opportunities further, financially successful people look for specific patterns.
We will explore thirteen patterns of opportunity that the successful look for in this follow up post.
SOME CLARIFICATIONS
Before proceeding to the list, let me note a few limitations. In this discussion, I have left out “typical” opportunities that are merely ordinary commerce—like entering into a field (such as law) solely because it is a way to make a living. And, the list below does not go into simple observation either—like being fortunate enough to notice a precious stone on the ground.
Instead, these are patterns exist when there is an unusual or extraordinary opportunity, not a one-off or a job.
Moreover, this list is hardly all-encompassing. It is just what I see most often in financial literature and what I notice from my own experience.
Finally, these opportunity patterns are presented as summaries. The discussion barely skims the surface. However, they are linked to other articles that may be helpful if you want to explore the subject further. And some may be the subject of entire future posts in MMH.
NO 1. PROFIT FROM THE DIFFERENCE BETWEEN SHORT AND LONG TERM RETURNS
I mention this opportunity pattern first because it is the most common method of accumulating wealth. Taking advantage of the differences between long and short term returns is a “get rich slow” approach and a reliable way to build wealth. See an example here.
The key to making this strategy work is not raw talent, but self-control. That is, the self-control to generate savings and then invest them in the long term. After all, talent is not distributed equally, and most people do not have the ability to say, be a CEO, and earn millions. But they do have some control over their expenditures and what happens to their savings.
Not convinced? Consider the example of Ronald Read, a janitor and gas station attendant. He lived frugally, saved his money, and put it into long term investments (stocks). You can imagine everyone’s surprise when upon his death, he left most of his $8,000,000 estate to the local library and hospital. Mr. Read understood and focused on the advantage of long term investing, and that focus made him a fortune.
Of course, it took Mr. Read many decades to achieve such a high net worth. And that is the rub for most people. Many do not want to wait. Nonetheless, financial patience and long term planning have been shown over and over to be one of the surest ways to wealth.
NO. 2 NOTE PRICE DIFFERENCES AND PROFIT FROM THEM CONSISTENTLY
This opportunity pattern is also known as arbitrage and is Item 1’s short-term cousin. One common adage notes this strategy in its most basic form: buy low, sell high. For instance, you probably have read about successful Amazon sellers who buy things cheaply and then resell at much higher prices.
But taking advantage of price differences takes many other forms too. On Wall Street, traders make bets on the difference in price between companies that are acquiring others, and those that are being purchased.
In another example, one excellent and prominent blogger noted the difference between San Francisco prices for real estate where he lived and those of the Midwest. You can see how he has taken advantage of it here.
NO 3. SOLVE PROBLEMS
If you have a solution to a problem, the world beats a path to your door. Problem solvers, whether they cure cancer or find better ways of doing things, create wealth.
The most successful people solve problems. Or, they hire those who do.
NO 4. FILL A NEED
I know, this sounds obvious. But you would be surprised how often it is overlooked. If consumers want sandwiches, for instance, the successful take note and act. They sell sandwiches. They don’t try to sell breakfast cereal instead. It is their customers’ needs that come first.
NO 5. FIND AN OUTCOME AND MATCH IT TO A SOLUTION (SERENDIPITY)
A famous example is the Post-It notes.
The 3M Company worked hard to develop new glue in the 1960s, but the effort failed. The newly developed glue just would not permanently adhere to surfaces the way it was supposed to, and paper could be easily peeled away from it after it was applied. And because the glue was a failure, its use was shelved until an employee, Dr. Spencer Silver, got the idea to market it within 3M as a “solution without a problem.”
It still languished for five years until one scientist used it to mark pages in a hymnal in church one Sunday. That successful use got others to think about how profitable it could be. Eventually, Post-It notes were born.
Alternately, serendipity occurs when people start with one idea and discover another opportunity. For instance, many famous companies started out selling and developing one product but switched when they found that what they first considered “sideline businesses” was far better.
NO. 6 EXPLOIT GROWTH
In every age, there is an opportunity to invest in or work with groundbreaking technology that promises phenomenal growth. In the 1890’s it was the industrial revolution: steel (Carnegie), railroads (Stanford), and oil (Rockefeller).
Today we are in the midst of tech, biotech, and artificial intelligence revolutions. Not surprisingly, some of the wealthiest people in the world are invested in those fields.
But growth can come from many sources and can take different forms.
For instance, some people look at whole countries and consider whether they want to be invested there for growth opportunities.
Others work in support of the industries of fast-growing businesses, not the industries themselves.
After all, most people are not experts in gene splicing. But, they may provide services needed by those who are.
NO. 7 DO THINGS FASTER (AND BETTER)
Some of America’s most profitable companies grew because they save their customers time. When you can do something faster than everyone else, you have an edge. If you have high quality and convenience, that is even better.
The fast-food industry is one example. Amazon, with its same-day delivery, is another.
Speed matters.
NO. 8 INVENT SOMETHING THAT IMPROVES PEOPLE’S LIVES
The process of invention results in new creations that solve problems or fill needs. For instance, transportation done by a horse and cart worked in the 1890s. But the new invention of the car around the year 1900 allowed that need to be filled more efficiently.
However, the general thinking about inventions has been undergoing a change. For instance, corporations like Amazon don’t invent things as an end in itself. Instead, they use inventions as part of a broader process to serve customers. New inventions often mean outsize profits.
NO. 9 MAKE AN OBSTACLE DISAPPEAR
Obstacles block profitability. So the idea is, remove the barrier, and you can make a fortune. And, there are almost as many ways to make an obstacle disappear as there are obstacles—destroy it, go around it, pay others to remove it, coopt it (if the barrier is a person)—you name it.
You remember in the first post; there was a story about one “lucky” woman who managed to win the lottery four times! However, there is a high probability she found a way around the obstacle(s) the lottery presented. After all, she had an advanced degree in mathematics from Stanford.
People who find ways to eliminate obstacles do well.
NO. 10 ESTABLISH OR INVEST IN A MONOPOLY
No doubt about it, business is terrific when you are the only game in town. A business without competitors generally makes phenomenal profits.
However, most monopolies in the U.S. are heavily regulated.
Of course, that does not mean that businesses and individuals are not busily trying to create monopolies. It is just hard to do it.
Instead, there are other tactics that keep competitors at bay. For instance, sometimes, superb expertise keeps competitors away. Or, other times, competitors must invest so much in competing that it is impractical. The reasons for the lack of competitors in various businesses are legion.
And sometimes being the only game in town is just a matter of circumstance. If you own a drawbridge and your nearest competitor is miles away, you effectively have a monopoly and can charge what you want to get others across the river. Some investors refer to both examples as moats and drawbridges. Those characteristics are what the successful look for, and many invest accordingly.
Monopolizing control is another way to proceed. An example in real estate is when someone purchases a key piece of a larger parcel. Essentially they monopolize and control the chance to develop the entire plot. The owner of the one single parcel holds veto power and usually wants an extremely high price to be bought out.
And then, monopolies exist when there are obstacles for customers to exit. If you have ever changed banks or Internet service providers, you know that the change can often be difficult and time-consuming. Those issues tend to confer monopolistic-like characteristics. For consumers like me, sometimes the inconvenience of leaving prevents me from making the changes I should.
NO. 11 LOOK FOR NUMBERS—IN CUSTOMERS OR INVESTORS
The ability to gain large numbers of participants—such as customers and investors, allows a business to operate at a more efficient scale. That is important for success.
In a counterintuitive example, this is part of the reason why some indigent refugee groups have had phenomenal success, far beyond what one could reasonably expect. While each individual may not have much capital, some communities use their numbers to combine resources, avoid debt, and can pool enough money to buy a business. It is the ability to get many people to share resources together that makes the difference between success and failure.
Of course, that idea of looking for and taking advantage of large numbers manifests itself in ways that go far beyond investing. In fact, the concept of monetizing large numbers is also what drives many tech and biotech venture capitalists (VC’s). Except when they do it, the idea is to make sure there are large numbers of customers, not necessarily investors.
So when VC’s consider new tech proposals, it does not matter much than an idea is innovative. It does not matter much that it is technologically savvy. What matters most is that the technology has an enormous potential base of users (numbers) so that its implementation can become profitable.
There is an opportunity in numbers.
NO.12 USE UNUSED RESOURCES
Much of the sharing economy is based on this premise. The idea is that if an asset is unused much of the time, that is an opportunity. Airbnb is based on the simple idea that if a room or area is unused, it can be rented instead.
NO.13 SEE THE OPPORTUNITIES IN FINANCIAL DISASTERS
When most people think about this, they envision financial vultures who try to buy foreclosed homes or bankrupt businesses for pennies on the dollar.
However, this strategy takes many other forms, too, not just “buy low sell high” arbitrage as in pattern No. 2.
Sometimes the financial pieces, such as in a business, can be re-used, but differently. For instance, the parts of a company with several different functions can be:
- recombined
- stand alone as an independent entity
- managed more efficiently
- used as a solution for a different problem (Serendipity, No 5).
THE COMBINATION OF PATTERNS
Needless to say, many of these ideas are not just stand-alone patterns. There are often combined together to create even better opportunities for those who notice them.
SUMMARY
1. Luck is a skill that is mostly due to a positive outlook and being observant.
2. The successful often look for patterns or circumstances that lead to good fortune. Then they act accordingly.
LESSONS/ACTION STEPS
1. Take a long term view and exploit the arbitrage between the short and long term rates of return to build a fortune. It is the most common way for individuals to succeed.
2. Think of technological shifts and change as an opportunity. Use them to your advantage.
3. Take the time to question if existing ways of doing things are best. Figure out if “problems” can be solved or “obstacles” can be eliminated.
Disclaimer: consult with a financial professional before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Photo credit: Portrait of a Lady with binoculars, 1894, Public Domain
Artist: Anna Bilińska-Bohdanowicz
© Copyright 2019