This Single Investing Rule Made Peter Thiel Billions
By: Adam Aya
Tags: Money, Investing, Finance, Stock Market, Technology

This Single Investing Rule Made Peter Thiel Billions

Seek Monopolies, Avoid Competition

Photo by BP Miller on Unsplash

Peter Thiel, who turned into an entrepreneur and a venture capitalist after he succesfully co-founded and sold PayPal, has just seen his net worth jump to over $5 billion dollars in recent months. This is quite an achievement having started with ‘only’ $10 millions after Paypal was sold to eBay in 2002. He developed his investing strategies in a controversial book called Zero to One where he states that competition is for losers. In this article, we look into how Peter Thiel used this statement as a key investing mantra which helped him score big in Airbnb, Palantir, Facebook and SpaceX amongst other successful investments.

Avoid markets where there is perfect competition

Perfect competition is considered the default state of any market. Here, companies compete against each other with products that are barely differentiated. Market price is determined by the interaction of supply and demand. The higher the margins in any given market, the higher the incentive for any new company to enter the market. When a market becomes too competitive, both prices and margins drop. Peter Thiel states that, under perfect competition, in the long run, no company makes an economic profit.

Peter Thiel states that, under perfect competition, in the long run, no company makes an economic profit.

Seek monopolies

Peter Thiel defines a monopoly as the opposite of perfect competition. A monopoly dominates a given market and controls prices. Given customers have no alternatives, monopolies face inelastic demand, meaning they can increase prices without significantly impacting demand.

A good example of such business model is Google. The US tech company holds more than 70% market share in the web search market. It has such strong dominance that the word ‘google’ has made it in the Oxford English dictionary as a verb. However, to downplay its dominance, the company labels itself as an advertising company or more broadly a technology company. In fact, within these industries, Google only owns a small market. These tactics help the company downplay its monopoly in web search given economists and the media typically give monopolies a bad press. Peter Thiel stresses that one should seek creative monopolies which are corporates that continue to innovate to make their dominance long-lasting.

Big wins in Palantir, Facebook, Space X and Airbnb

Acquiring stakes in monopolies has been a key investing mantra for Peter Thiel over the years and has helped him achieve spectacular returns. In the early 2000s, he invested $500,000 in a Harvard drop-out kid’s business called Facebook which turned out to be the largest social media platforms out there. Peter made most of his wealth from investing in Palantir which labels itself as a big data analytics company but is in reality a counter-terrorism and fraud investigation data company. Other investments include SpaceX, the dominant space company in the US and Airbnb, the largest rental online marketplace globally.

Yes, Peter Thiel has a big advantage of being able to take positions in monopolies at an early stage. But, for the rest of us who don’t have access to these deals in the private market, we can use his investing mantra to invest monopolies as soon as they become listed.

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