Charlie Munger Quote

Mastering Tech Investing: 4 Lessons from Constellation Software (Tech Strategy – Podcast 213)


This week’s podcast is about Constellation Software. And their approach to software investing.

You can listen to this podcast here, which has the slides and graphics mentioned. Also available at iTunes and Google Podcasts.

Here is the link to the TechMoat Consulting.

Here is the link to the Tech Tour.

On the Constellation webpage, they actually list their criteria for both “exceptional” and “good” companies. Here’s what they say.

  • Exceptional businesses
    • Mid-to-large vertical market software businesses. With greater than $1M EBITDA.
    • Consistent earnings and growth. Constellation has a good equation for this:
      • EBITDA/Revenue + Revenue Growth = 20%
    • Experienced and committed management.
  • Good businesses
    • #1 or 2 in a niche vertical market
    • Revenue over $5M
    • Hundreds or thousands of customers
    • “Unimposing” competitors

And they say they prefer to buy 100% of businesses if the management will still be involved. Like Buffett, they want to acquire the business and its management.

Constellation is an interesting company to follow if you invest in tech companies. Just follow their transactions. They do lots of them and you can learn a lot.

Cheers, Jeff


Related articles:

From the Concept Library, concepts for this article are:

  • Switching Costs
  • B2B Customer View: Necessary vs. Critical vs. Strategic

From the Company Library, companies for this article are:

  • Constellation Software
  • Warren Buffett / Berkshire Hathaway

——–transcription below.

Episode 213 – Constellation

Jeffrey Towson: [00:00:00] Welcome, welcome everybody. My name is Jeff Towson, and this is the Tech Strategy Podcast from TechMoat Consulting. And the topic for today, four lessons in tech investing. From Constellation Software. Now, Constellation, very well known company, been around for 30 years, Toronto based, and they are specialists in buying, managing, and growing software businesses.

They’ve been doing this forever mostly private companies and they put them together into various operating groups. Long history of doing this, but they’re really experts in software investing. And specifically they’re on the, on the B2B side industry verticals, things like that, not a lot on the B2C side.

So anyways, a lot of good lessons in there on how to think about this stuff. And I’ll sort of go [00:01:00] through the four lessons that I think are most important for people who are not buying private companies. There’s a lot more to it if you’re doing private stuff, but most people listening to this are probably not doing that.

So anyways, this is just general tech investing lessons. Anyways, that will be the topic for today. Should be pretty good. I hope. Let’s see. Standard disclaimer. Nothing in this podcast or my writing or website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions expressed to me may no longer be relevant or accurate.

Overall, investing is risky. This is not investment legal or tax advice. Do your own research. Oh, a little housekeeping stuff. We are doing another tech tour into China in most likely end of October or first or second week of November. This is going to be e commerce and retail focused. So an e commerce and retail tour Shanghai, Hangzhou and [00:02:00] obviously the key companies you want to go to.

That’s where we’re going. So sort of a deep dive on that. I think that’s gotten maybe more helpful for those that are in retail consumer products, merchants, brands selling on retail. You know, the leaders in this, in my opinion, are in China. I think the strong, I think China is the epicenter for e commerce innovation. Way ahead of most of the world, including, including the U. S. So, lot of good lessons there, just for understanding best practices, what’s coming next. By sort of the innovation leaders. And then you can take those back to your home countries. Doesn’t assume anyone’s going to be investing in China.

More like lessons learned from the leaders. Anyways, if you’re curious about that, go over to TechMoatConsulting. com. You’ll see the details of the tour, price, all that stuff is there. Okay, let’s get into the topic. Okay, there are a couple concepts for today that I think are valuable. These are all going to be in the concept [00:03:00] library, but there’s really two, I guess, that are the big ones.

The first one is switching costs. Why does Constellation software focus on the enterprise side, the business side, going deep into industry verticals? Manufacturing, Healthcare, Retail, as opposed to the consumer side, the customer side, well, consumer side. Switching costs, I mean, it’s very hard to build switching costs in software on the consumer side, B2C, because consumers don’t like it.

You’re basically creating a point of friction. And, you know, half the software companies out there are in the business of removing pain points. But if you’re going after switching costs, you are in the business of sort of putting pain points in, making it hard for people to leave. Consumers don’t like that.

It’s pretty common on the business side, it’s accepted. So switching costs are a big part of what they’re doing. [00:04:00] The other concept would be critical cost. Business expenditures. Now, I always look at the business side, you know, businesses as customers, but you could also put government as well. As, you know, when those entities spend money, It’s usually a person.

You think about business is buying things from their vendors or suppliers and that’s true. But it’s actually a person. It’s a purchasing manager. It’s a CEO, COO. So yes, it’s an enterprise, but there’s a human at the center of it. And You think about how they buy and what they care about. And one of the things they care about, anyway, so when I look at those purchases, I put them into three buckets.

Is this a necessary purchase? Is it a critical purchase or is it a strategic purchase? And the behavior and the psychology of the purchasing person and the company is very different for those three. And the best one on the list is [00:05:00] when it’s considered a critical purchase. What does that mean? It means, If something in this purchase, maybe it’s a technology, maybe it’s a component to an automobile, if something in that purchase goes wrong, it has implications far more than just that item.

If you’re a car company and you buy tires from a new vendor, you switch. Okay, you might save some money, but the tires might be bad. Does that impact your business? No, you’ll discover that the tires are bad and then you’ll switch back to the other one. Easy. If it is something critical like the airframe for a Boeing 747, and it turns out there’s a problem with the airframe because you switched, from your current vendor to someone else who was offering you a 10 percent discount and you [00:06:00] discover that there’s a problem in the airframe.

One, it could bring down your whole company. Two, it’s almost impossible to undo the decision because the airframes are out there and you have to redesign the old, the whole episode. That would be considered a critical purchase. If you’re in the business of selling to businesses, To a lesser degree, governments.

If you are selling something that is considered critical, you tend to be in a much stronger position as opposed to just selling something they can swap out like tires. So critical B2B purchases, that’s something Warren Buffett does a lot of. In fact, it’s one of his main strategies, I think. That’s also something that Constellation focuses on.

So those two concepts are the ones for today. And you can go on the Concept Library and find lots and lots of examples of these. Critical purchases and the idea of switching costs. And you could argue that critical purchases [00:07:00] are a type of switching cost. I think they’re more powerful. Anyways, so those are the two concepts for today I’ll talk about as, as we get through the subject.

Alright, let’s little do a little intro to Constellation, which is a cool company. It’s publicly traded on the Toronto Stock Exchange. You can pull up their filings and they’ve been around since 1995. I. So long history. In the history of the company, they’ve bought about 500 plus companies, and they’re really doing acquisitions.

Most of these are private companies, or you’re taking them private. Most of them are small, 5 million, although they are doing big ones too. And, you know, they say that we acquire

They have a couple of operating vehicles, which you’ll, you know, if you [00:08:00] look up constellation software, just Google it, what will come up is a long list of recent acquisitions. Or they’ve increased their stake into something. I mean, it’s all the time. They’re buying, they’re increasing their stake. It’s usually not done as a Constellation software.

It’s usually done as one of their operating groups. So you’ll hear Valaris Group, Jonas Software, Harris Computer Systems, Vela Software, Perseus Operating Groups. These are all operating groups within Constellation and they do a lot of acquisitions. And they do it at the portfolio level. Now, for those of you who like Warren Buffett, sounds a lot like his structure, right?

They do acquisitions at the Berkshire level, but then they have their energy group. They do a lot of bolt on acquisitions in railroads, energy, things like that. So you’ll see there’s a lot of analogies between Constellation and Berkshire Hathaway. [00:09:00] Okay, so, Let’s say they right now they have about seven operating segments major ones Volaris group, let’s say Harris computer system.

What do they do? They mostly do I think public sector Software solutions so utilities education healthcare, but they’ll also do business Software so retail payments insurance, you know Harris computer systems has over a hundred software businesses in it Jonas, 140 companies, Hospitality, a lot of construction.

Vela Software, more industrial. A lot of oil and gas manufacturing and so on. Okay, so the, this company is really, An interesting combination of an M& A group and an operating group. They’ve got deep expertise in both of those [00:10:00] skills. Now keep in mind, most operating companies don’t have the M& A experience and expertise.

They tend to be pretty bad at it actually. Berkshire is another company that has both. They have deep operating experience at their insurance level. in the energy group, things like that. But when it comes to acquisitions and capital allocation, you know, Warren is Warren. Sounds like I know him. I mean, he’s as good as you get as a capital allocator.

So anyways, in this case, Mark Leonard founded the company in 1995. He’s still president and chairman. I mean, that’s something I love to see. I love to see someone who’s 30 years at the helm and has a track record of 30 years you can study. Prior to that, when he was in VC, so I mean his whole life, he has spent investing and outright buying software companies, so super good person to follow.

Okay. And as we start to look [00:11:00] into what they do, you can see that he sounds a lot like a value investor. He talks or Constellation talks a lot about, we want to buy truly great companies, exceptional businesses. with great management. We want to hold them for the long term. We like to delegate authority and be sort of decentralized.

And now that is straight out of Berkshire Hathaway like speaking. But, you know, when you apply that to software, you have to kind of change it. Because software is a bit more dynamic, a lot more disruption. Things change quicker in software as opposed to Coca Cola. Constellation has 50 plus, you know, 50 plus thousand employees.

Anyways, very cool company to study. I think there’s a lot of reasons to look at it and you could consider buying into Constellation outright. It’s pretty hard to take apart because they have so many companies. So it’s a bit [00:12:00] like buying into Berkshire. You know, it’s very hard to do a Hathaway without valuing all the component companies, which is very difficult.

But people, you know, people tend to look at management and that’s what they’re investing in. Okay, within all of that constellation, what matters? In my opinion, this is all about recurring revenue. That is the engine of what they do. They are looking for recurring revenue in terms of software for business and government and they lean hard into building switching costs.

and being the critical component that you buy. Now you’ll hear that word critical a lot when you look at their filings and commentary. You’ll hear the same thing from Warren Buffett. You’ll hear the same thing from IBM. These companies like to provide the tools and [00:13:00] software that are part of the critical workflows of these companies because those are the ones you don’t switch out.

Those are the ones you keep for 20 years. Why? Because If someone offers you a cheaper solution. Yeah, you could switch out and save 10%, but the cost benefit doesn’t make sense. Why would, you know, this is a critical component. If we’re a large truck manufacturer like Wabco, which Warren Buffett invested in, Wabco, I’m sorry, not Wabco.

If the company Wabco supplies components to large truck manufacturers, mostly in Europe, the component they. provide are the braking systems. They’re specialists in braking systems for very large trucks. That’s Wabco. Because if there’s one component as a truck manufacturer you don’t mess around with, it’s the [00:14:00] braking systems.

Because if something goes wrong, these are massive trucks going down the thing, you know, the highway at 60, 70 miles an hour. So you might switch out a lot of components to your trucks, but you think long and hard before switching out of the braking systems you’ve used for 20 years. So you get switching costs that are built in and eventually it’s like, look, the cost benefits not worth it.

Why would I risk the entire company to save 10%? Let’s just stay with the braking system we know. A lot of what Constellation is the same thing, you know, they want the part that you’re going to think long and hard before switching because it’s considered critical to your company. Anyways, if you go through the financials, I won’t go through them.

They will make money on one time licensing fees for software. They will make money on some hardware. But most of their revenue comes from the ongoing fees you [00:15:00] get year after year. Recurring revenue is the engine of Constellation software. What does that come from? Well, that could be SaaS that could be managed services.

That could be software support contracts. They all, it could be transaction revenue, where if you’re running your payment system through Constellation software, every time a payment comes in, you get 1%. So those recurring fees are what they want. They also do a decent amount of consulting, which is for installation, customization, things like that.

But most of the money, if you break down their revenue, first quarter revenue for 2024. was 2. 3 billion dollars. So they’re making 8 to 10 billion dollars in revenue per year. Of that 2. 3 billion dollars in first quarter of 2024, 1. 7 billion comes from what they call maintenance and other recurring. So recurring revenue basically.

The other components are hardware, [00:16:00] quite small. One time licenses fee, quite small. Professional services, a lot of consulting, customization, you know, 470. million. So, you know, the majority is coming from those recurring fees. Okay. That’s a nice business model. Focus on the critical activities. Get your software in there for businesses and government is a big deal and then have powerful switching costs in critical areas and you can just sit there forever.

It’s a good strategy. Okay. That’s kind of an overview for Constellation. Assuming most people listening to this are not in the business of buying lots and lots of software companies outright I’ll give you sort of three to four lessons that I think are important as either an investor looking at a public company or as a CEO where you’re maybe looking to do an acquisition, what you’re thinking about but mostly the first.

All right. [00:17:00] First lesson, if you have an investor plus an operator structure, It’s much easier to invest and you can basically have endless growth. And this is the Berkshire model, but it’s also the Constellation model. Why does being an investor and an operator matter so much? Well, the first reason is, I mean, this is what my old boss used to do.

I wrote a whole book about this called Value Point. When you can bring more to the table than just capital, The, the ability to invest goes up dramatically because it’s not like I have to find a good company that’s great now, put in the money and I’m passive. No, you can be more active. So you can buy companies which things are a little broken and fix them.

So once you have both capital and some ability to be an operator, your spectrum of investments goes through the roof. So [00:18:00] investor plus operator is a more powerful structure. Two, it gives you endless growth. For most businesses, they’re sitting in a vertical, they’re sitting in a space. You’re an e commerce beauty company.

Your ultimate growth is going to be limited by that industry, probably. But if you’re a fairly active investor as well as a beauty e commerce company, you can move into other spaces. Because you could buy a company and it could be part of your beauty e commerce space and it’s a bolt on acquisition. Or, it could be in a new area that you think is going to be attractive.

So by having a portfolio plus being an operator, you can basically grow forever. Because if, if the space you’re in runs out of opportunity, most things only get so big, you can move other places. So Constellation, one of the reasons I [00:19:00] think it’s an interesting company, is because they can basically grow forever, just like Berkshire does.

Okay, so that’s lesson number one, probably not that relevant for most people. Here, lesson number two, more valuable. Lesson number two, Constellation, as a software investor, prioritizes predictability and competitive advantage. When people start looking at tech investing, they get very excited about growth.

Ooh, this could be a 10x opportunity. This could be the next Google. I don’t think that’s a great approach. I think that is very much a Philip Fisher type investing approach where look, we don’t have to think about value because if you’re going to buy a company that’s going to 10X over 5, 10, 15 years, the price we pay doesn’t really matter.

If we overpay by 30%, it doesn’t matter. [00:20:00] I don’t think that’s a great approach. I think the way Constellation does it, which is, no, we’re not looking for 10X growth. We are looking for a business that has high predictability going into the future. Yes, a cool and sexy tech company can go up by 10, 10X, but it can also go through the floor and get wiped out.

Now we want predictability. It may go up by 1X, it may go up by 50%, it may go up by 3X, but it’s very predictable and it’s not going to go down. So if you’re investing, there’s going to be one of three outcomes for the software company you’re investing in. It’s going to go up, it’s going to stay the same, or it’s going to go down.

Now, if over five years going down is not an option because you’ve got a lot of predictability, then there’s no way to lose. You’re going to invest and in five years it’s going to go up or it’s going to be [00:21:00] the same, but it ain’t going to go down. So you can’t lose. That’s a good, that’s kind of how I like to think about this stuff.

So predictability on the downside. Now, how do you get predictability on the downside? You’re looking for two things. You are looking for stable demand. Do I know if people are going to be wearing Ugg boots in five years? No, it’s a fashion trend. Maybe in five years, no one wears Ugg boots. So the demand could go down.

Do I know if in five years, everyone on the planet’s going to have a smartphone in their pocket? Yes, that is absolute. That is a highly predictable demand picture. So that has a nice floor on demand. Now who wins and what phone does well? I don’t know. I know every human being is pretty much going to have an iPhone or a smartphone in [00:22:00] their pocket.

So is it a big surprise Warren Buffett bought Apple? No. Do I know if every human being on the planet is going to drink water every day? No. Because you die if you don’t. So Coca Cola starts to make sense because there’s a very predictable demand scenario for liquid. Being drunk by humans. Okay. Are businesses going to use software systems to run their businesses five years from now?

Yes. Software is absolutely required for most all businesses. The demand picture is rock solid. So you need a predictability in demand, but Okay, against that demand in five years, who’s going to get the money? Is it going to be 100 companies? Is it going to be two companies? That’s why you want a competitive advantage, because you want to say, look, there’s a very predictable demand [00:23:00] picture, and there’s three companies that are going to dominate this space, so most of the monies go to them.

So you look for competitive advantage, that’s Coca Cola, that’s Apple, which is why I think Buffett invested in them. If you are doing business software or government software and you are a dominant player in a particular vertical, Like retail, like oil and gas, like manufacturing, and you have really good switching costs in critical areas, then you start to see, okay, this is a business that might make sense.

So I think that’s lesson number two. Constellation. I think the number one thing they look for is predictability and competitive advantage in particular. And that gives you a, you know, hopefully it gives you a a scenario where like, look, if we invest in this business, one of three things, one of two things is going to happen.

It’s going to do [00:24:00] well. It’s going to meander along, but it ain’t going to die. And then you can make the bet and you try and get a reasonable price. But you wouldn’t want to overpay in that scenario. Okay. So that’s number two. Lesson number three. And this is lesson number two is very similar to Warren Buffett.

On the business side, not the consumer side. Although it’s pretty common on the consumer side too. Lesson number three, and this is where I think Constellation parts ways with Berkshire. Constellation does focus much more on growth than your average value investor.

If you’re going to be in the software business, you don’t want to be in the software business and not focus on growth because software grows better than anything we’ve ever seen. It’s just the economics of software. There’s no, you know, there’s no factories. There’s no teams of a thousand consultants [00:25:00] or lawyers doing services.

No, the economics of software are bits and bytes on a computer screen. It can grow at almost no cost. It can grow with almost no capacity limits. So it’s cheap. You can grow fast. You can grow across national borders. I mean, software can grow like no other business. So if you’re going to be in the software investing business.

You gotta go for growth. What’s the point? So if you look at Constellation’s filings, what you’ll see the phrase a lot, consistent predictability. They are looking for, quote, consistent predictability. That was lesson two. You’ll also see the phrase above average growth. So they’re clearly balancing a focus on growth.

With predictability much more than I think people like Berkshire does or these classic value investors of which there’s a lot. If you’re going to be in software, you really do want to go for the growth. So I [00:26:00] think that’s if I had to guess I would say that’s the number two factor they look for sort of revenue growth soft, you know operating cash flow things like that.

And the last lesson, number four, tech investing does have greater uncertainties. It’s just the nature of the beast. Software changes faster. Technology changes faster. Even if you’ve isolated the customer behavior, hey it’s predictable, and the government’s not actively involved, technology simply changes faster than things like Coca Cola.

There’s greater uncertainty. How do you deal with that? Well, my under, when I read Constellations filings, what I see Is them combining a buy and hold strategy for exceptional businesses with a buy [00:27:00] and sell strategy for pretty good businesses. Now, someone like Warren Buffett talks about, we only want the best of the best businesses.

We don’t, we don’t want to be in a, in 10 or 20 mediocre soda companies. We just want Coca Cola, the best. Okay. The problem with that strategy is there’s not that many truly great companies. Everybody knows what they are. So he’s a buy and hold investor. But what a lot of people do is they combine a buy and hold in pretty rare exceptional businesses that you hold forever with a buy and sell approach in pretty good businesses.

Okay, it ain’t Coca Cola, but it’s Dr. Pepper. Well, actually, Dr. Pepper is pretty good. You know, but it’s, it’s an orange juice company. [00:28:00] There’s a lot of pretty good and mediocre companies that you can buy, but for them, you don’t want to buy them with the idea. I’m going to buy this and hold it for 10 years.

No, I’m going to buy this thing. I’m going to look for returns, but I’m also an active seller, buy and sell. So we think this orange juice company is not exceptional, but it’s pretty good. We think it’s worth a hundred million dollars. We can buy it for 75 million per share, you know, on a share basis today.

We will buy it and we will capture the margin of safety, but we are going to be ready to sell this thing because it doesn’t have all the exceptional qualitative factors that make it totally protected. It’s not totally protected. Consumer behavior could change. It doesn’t have a super powerful moat that protects it.

It’s pretty good, but it ain’t Coke. So with [00:29:00] those, you are much more of a get in and get out and get your margin. I think Constellation does this. And when you pair those two together, it’s actually a pretty good approach. Buying truly great companies and holding them forever is a really good strategy, but it’s really hard because there’s not that many of them, and they’re very hard to get at a reasonable price.

Exceptional companies are rare. Pretty good companies are pretty common. So you can buy and sell those all the time. And as you’re buying and selling, you know, significant volumes over the years within that activity, every now and then you’re going to find a truly great one. And that’s the one you hold forever, but you should be able to make money buying and selling pretty good companies. That’s also a, so one, it helps you find the great ones. The other thing is because of the uncertainties [00:30:00] of software. You do have to be more active in terms of selling. You can’t just put them in the portfolio and not think about it. So you want to be, and a good example of a company that does this is SoftBank, not Berkshire.

SoftBank is a much more active buy and sell company. But when they find something exceptional, like ARM Holdings, well, they sit that one in their pocket but they, they’re much more active. And I think pairing those together is a pretty good strategy. I think it’s necessary for software in a way it’s not necessary for a true value investor, you know, buying Coca Cola and American Express and Berkshire Hathaway and the standard portfolio.

Now, if you actually go to the Constellation website, you’ll see a You know, because they do private acquisitions whether they’re public or whether they’re truly private they actually list the criteria they are looking for, [00:31:00] for companies that want to sell. So, you know, if companies want to sell, they can see if they fit the criteria.

In their list of criteria, they actually break it into two different lists. One list is for exceptional businesses, and one list is for good businesses. It’s actually really helpful. And I’ll tell you what they are for exceptional businesses. This is what they say. They want mid to large vertical market software businesses that have EBITDA of greater than 1 million USD.

So they’re looking for, you know, medium size vertical companies. They want consistent earnings and growth. So you can see they’re, they’re sort of balancing their, their interest in predictability with EBITDA. And they actually have an equation for this, which I thought was really cool. They say in their criteria.

We [00:32:00] want EBITDA divided by revenue. So let’s say a company with 10% operating margins plus revenue growth to be at least 20%. So let’s say your EBITDA divided by revenue is 10%. Your operating margins 10%, and your revenue growth is 10%. Well, 10% plus 10% is 20%. So they’re literally balancing predictability and competitive.

And they have an equation, which is kind of cool, actually. And then they want experienced and committed management. They don’t want management to leave when they buy these companies. They want them to stay. They’re buying the company and the management, which Buffett does too. So their exceptional businesses are a lot like Buffett’s criteria, but they have that growth factor in there, which Buffett doesn’t usually say.

If you look at the criteria for good businesses, [00:33:00] they say number one or two in a niche vertical market revenue over 5 million per year, hundreds or thousands of customers and quote, unimposing competitors. Now that’s very interesting. So if you’re looking for a good business I’ve actually, I’ve got, I’ve been saying this for years, You look into the weird niche markets.

You look into the markets with very unusual criteria for competing. I like weird markets because I think you have to build strange businesses to win there. And if you’re one or two in a weird niche, small market, The big boys tend to avoid those. Like, this business is too weird. Why do we want to jump into this too weird business when it’s not even that big?

It’s not worth it. Buffett’s Business Oriental Trading Company, which [00:34:00] is a specialty e commerce business in Omaha, which I’ve written about and visited. It’s a very weird e commerce business in a niche little market. That’s a good strategy. Revenue over 5 million, so kind of small. Hundreds of thousands of customers and I like the phrase unimposing competitors.

Okay, so not a dominant moat, not an overwhelming competitive advantage, but the competitors they’re facing are not terr are not very scary. Unimposing. It’s a very interesting word to use for that. Anyways, I’ll list those criteria. I’ll put them in the show notes. Or you can just go to the Constellation Software webpage.

Pretty interesting. So that’s kind of lesson number four because of the greater uncertainties of software investing, it’s a pretty good approach to combine buying and holding exceptional business with buying and selling merely good businesses. [00:35:00] That is a really good strategy. Anyways, that is it for the content for today.

Not too long today, shorter, which I’m trying to do. I don’t always succeed, but I’m trying. But yeah, the lessons, I mean the two concepts for today, critical businesses and switching costs. You can go to the concept library, click on, you’ll see both of them listed there. I think those are fantastic to read about.

I’m a big believer on the enterprise side and looking for switching costs. I think it’s a much more predictable space than the B2C side which can, you know, be very unpredictable, but it grows faster. You know, there’s the saying, I don’t know who made this up. You know, investing on B2C in software is like trying to catch lightning in a bottle.

But investing on the B2B side is like mining. B2C companies are very unpredictable what’s going to take off. [00:36:00] You know, where did short video come from? I don’t know, but they can take off like lightning in a bottle. Super fast, but unpredictable. B2B software is like mining. Look, we know the gold is in the mountain.

We can see it from the scans. It’s going to take us a long time to get there, so it’s slow, but we know it’s there, right? I kind of like that analogy. Anyways, so those are the two concepts for today. Critical B2B businesses and switching costs and the four lessons. An investor plus operator structure. is a more powerful investing approach and it enables you to capture growth forever, which is attractive if you’re an investor. Constellation definitely prioritizes predictability and competitive advantage over, you know, rockstar, sexy, you know lesson number three, that Constellation does focus more on growth than your typical [00:37:00] value investor. They’re balancing those two and going for both, which makes sense. And then number four, the last one, because of the greater uncertainties, you know, buy and hold great value.

exceptional business plus buy and sell good businesses is a pretty good approach. Most people end up doing that because if you’re just going to buy the truly great businesses, you end up sitting and waiting and you can’t find anything, especially some years where you can’t find anything that’s not crazy priced.

Anyways, that is the content for today. As for me, I’m just working away. I’m always happy when I’m productive. If I’m not being productive, I get very unhappy, which is weird, but it’s true. So if I get my 8 to 10 hours of working every day, I’m always pretty much in a good mood. Fun stuff. I’ve been watching this TV series, Billions, which is nothing new.

It’s, you know, it’s about the hedge fund manager and the super aggressive attorney [00:38:00] general and, you know. It’s a cool show, right? And it’s totally bad for me. Like, I’m convinced it’s very bad for me. You know, it’s this hedge fund. It makes you, it turns you into a shark. Like, I start to feel more aggressive when I watch this show.

Like, and I hate to say ruthless, but a little bit. Like, I start to feel more ruthless. I’m not sure what that’s about, but I think it’s actually bad for you. Since I’m talking about Warren Buffett, there was an interesting Warren Buffett quote where he said he never buys anything, stocks, whatever, When he’s in New York City, he always waits until he gets back to Omaha and then waits there for several days.

Cause there’s something about being in New York that it makes you aggressive. It, it makes you jump onto trends and what’s hot. And there’s a lot of sort of envy when you see other people making a killing. Do it. I mean, it becomes very envious place to live. Oh, look at this guy’s apartment. Oh, he made a killing.

I think maybe [00:39:00] because you have such a spectrum. of wealth, but everyone’s living next to each other. So you really do see it. You walk from your apartment. I used to live on the Upper West Side of Manhattan, but you know, I would, I was one block off Central Park. As you walk to Central Park, well then you’re walking down Central Park West, which is all the billionaires.

So it’s like the billionaires and the merely successful and regular folks and everyone’s living next to each other and you all see each other. Something about that that’s very not, it’s really not healthy. That, that sort of envious thing, I think it’s supercharged a little bit. If you go back to Omaha, if you live in Omaha on a regular street in a nice three or four bedroom house like Buffett does, you really don’t have that.

You know, I think you’re more, I, I feel the same actually, like if I go to New York or Shanghai or Beijing, I start to get very aggressive. But when I’m back just sort of living home [00:40:00] daily life, I feel very calm and that fades away. And I think it’s good for you. I think Omaha is the same. If you hang out in Omaha, I think you become a very rational, non emotional, calm investor.

But you know, drop someone into Hollywood or Silicon Valley or New York City or anywhere in China. That aggression thing just, for me at least, it just goes way up. And I don’t think it’s really healthy. Anyways, I start feeling the same way watching this TV show. Oh, you know, let’s get aggressive. No, it’s not good for you.

Well, it’s not good for me. Anyways, but it’s a good show. I’m on season one right now. I’ve watched, I’ve watched a little bit of it years before, but I never really watched the whole thing. So anyways, it’s kind of fun. I’m not sure if that’s a recommendation or not, but it’s that’s what I was thinking about last night when I was watching it.

Anyways, that is it for me. I hope this is helpful and have a great week and I’ll talk to you next week. Bye bye.


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.


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