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Entrepreneur Arbitrage Spreads and the Commonality of Locality
Posted by: Tannor Pilatzke (IP Logged)
Date: February 27, 2014 05:27PM
There is a great book that was written in 2000 by Amar Bhide called "The Origin and Evolution of New Businesses."
As Greenwald explains, competitive advantages that lead to market dominance are more likely to be found when the distribution and consumption takes place locally versus a large and scattered geographic region. This is ironic because competitive advantages tend to be specific, concentrated and local versus general, vague and diffuse. The more distance or time distribution must travel to meet consumption, the higher the costs of logistics. The less distance a message has to travel the quicker information can be absorbed. The stronger the connection or association to the service or product, the greater the emotional attachment and switching costs.
The arbitrage spread is the 30 miles between gas stations.
The good news is that the arbitrage spread can last for years. Given enough time, durable barriers to entry may be created such as a lasting brand or close supplier relationships and discounts. Jumping from niche to niche, taking advantage of new arbitrage spreads is the only way to scale, usually the result of demand and supply opportunities a business is able to exploit.
“Durable competitive advantage is usually the result of unpredictable and rare random events, like IBM’s call to Microsoft to sell them a PC operating system when Microsoft had never built an operating system before and did not have one to sell. These events have no pattern and cannot be forecast when a startup is being formed. They happen to a very small minority. Once a startup has acquired a durable competitive advantage, and investors get an opportunity to buy in well below intrinsic value, backup the truck.” – Mohnish Pabrai (Trades, Portfolio)
Guru Discussed: Mohnish Pabrai: Current Portfolio, Stock Picks
Stocks Discussed: MSFT, GOOG, SODA, FB, TSLA,
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