The Flywheel Portfolio

The “Flywheel Effect” as a business concept was introduced by Jim Collins in his seminal book Good To Great and it was used to state the fact that companies don’t become exceptional as a result of a single intervention or initiative, but rather from the accumulation of little wins that stack up over years of hard work …

The more I look at that Jim Collins Flywheel effect I think a great example of a Flywheel Effect company is Amazon. In fact, I keep asking myself if AMAZON has created an Infinity Flywheel. Whats to stop them?

On the other side of the coin, Collins, in the same book, also introduced the Doom Loop. The Doom Loop "is characterized by a parade of leaders, shifting strategies, and consistently poorer results.

Here is a pretty good article explaining the two:

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&…

One last thing to bring up before we get to the meat of things here is: Hedgehog Concepts.

“Jim Collin’s “Hedgehog Concept” says that it’s better to focus on doing one thing well than to spread your efforts between a range of things. It follows that organizations should focus on something they are good at, passionate about and which is profitable.”

Ok got it? If I put that all together in the guise of building a portfolio I get something like this:

1a) Build your investing portfolio roster around Flywheel Effect Companies and particularly those that feature spectacular growth, game changing potential and clock like performance.

1b) Focus on building though consistent little wins

  1. Do not constantly shift strategies - follow a well structured plan.

  2. Focus your energy, time and effort on what you do best.

Note: You of course could summarize all that with some other stuff I suppose but thats what I come up with.

So where exactly am I going with all this? Well…thats pretty simple and explained in two parts:

  1. At a minimum, the Core High Confidence companies (STARTERS) should be Flywheel Effect companies - or - FECs for short.

Currently that would be:

DDOG
BILL
SNOW
ZS
CRWD

I could argue fairly well that DDOG, BILL and SNOW are ask Flywheel Effect companies. But what about ZS CRWD and S? S and CRWD keep jockeying for the fifth STARTER spot. Which brings up the question - which of the two, if either, might better fit the Flywheel Effect goal? Go with the leader CRWD or the challenger S? Not to mention that ZS is in the same line of work. Dilemma: concentration of a great deal of the portfolio on cloud security. Hmmmm - makes my brain ache.

The other companies in the portfolio are:

MELI
MDB
GTLB

I would call MELI and MDB as FECs as well. GTLB I’m not so sure about: Have to think about it.

Ok so point #1 is to cram the Portfolio with FECs from the STARTERS as a minimum all the way down to the Scout Team. You have to dump into the consideration potential, valuation, competitors, progress to profitability, and ongoing performance - but, we do most of that anyway. Ok well a lot of it…ok ok some of it. But the point is that true Flywheel Effect organizations have solid, continuous leadership which may be the key ingredient in the entire recipe. Sort of like oregano and spaghetti.

Thats a lot to think about.

Take TSLA for example: 1 primary product - one strategy - one continuous leader: is TSLA a Flywheel Effect Company? I mean…sure it was once but is it one now? Yeah…well maybe, but has its dominance run its course? It’s being besieged by competitors on every side and, as it turns out, it’s pretty easy to design and make EVs.

So how to find these super duper Flywheel Effect Companies?

Note: this is one of those things I use a cheat sheet on.

I track a large number of growth stock subscription services led by folks much smarter than myself, collate all the various recommendations into a giant heap, and then try to select those that seem most promising. Who are these smarty pants folks:

The FOOL
Bessemer Venture Partners (free)
Tip Ranks
Bert Hochfeld
Andres Cardinel
The Beth
Saul
The ARK funds
IBD

There are a couple of others but thats the core. I just dump all the recommended companies into a sort of a personal rating system - blend them all up - and see what comes out. Seems reasonable.

Ok so on to point #1b: Focus on building though consistent little wins

Lets say you have been successful in putting together a fantastic portfolio roster chock full of exciting FECs. What do you do to achieve consistent little wins? Now - if you are a LTBH investor I suppose you sit back, cross your arms self contentedly, and watch your investment garden grow. AT that point the investor is in the old: No matter where you go - there you are status which translates to No matter where the market goes - there your portfolio is. Right?

So in the above noted example, there is not much an LTBH investor can do to generate a Flywheel Effect Portfolio of consistent little wins. Not happening. So what to do? I suppose you know where this is going?

Trading Blocks are my answer to padding the bottom line with consistent little wins. Now…I certainly haven’t stumbled onto a spark of genius - and I surely didn’t invent the idea of TBs or even been the first to thunk them up. But I can find little fault in the concept: while maintaining core allocations in High Confidence companies add small blocks of shares when the tide goes out - and sell those small blocks of shares when the tide comes in.

Any way you look at it - If two portfolios with the exact same companies compare results at the end of the day - the one padding results with small consistent wins - wins. I am pretty sure the math works that way although I have never particularly been adroit at complicated math formulas.

Finishing up - want to be even a little successful at investing? Once you figure out what you are good at - don’t go changing horses in the middle of the stream. Stick to your plan and strategy, even if it’s just the strategy you swiped from Saul. And if your strategy is simply LTBH then recognize that you have to take the bad markets with the good markets - and, as it has been said many, many time: it is relatively easy to stick to being a LTBH person in Bull markets - but not so easy in bad Bear markets.

So in the end I get back to this:

Stock your roster with real gold - Control your emotions, Eyes to the front, Mark your targets when they come, Retreat to High Ground when needed, Hunker Down when necessary.

All the Best,

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