I'm the luckiest guy in the world on a number of levels, and that includes investing in stocks.
Luck is a variable in performance, but that's all it is. One variable. I'm happy to be lucky, but I'm also confident in my stock-picking ability. How could I be otherwise? Ten out of 10 picks last year crushed the market, and so far in 2013, it's 10 for 10 again. So much for coin-flip odds. By the way, if you're interested, you can check out my stock-picking record here.
But here's where luck is a big component, and why I wake up every morning and pinch myself. The reality is that my skill set just happens to be at the right place at the right time. Put me in a different cycle and, while I'd like to think I could outmaneuver the average Joe, it wouldn't be to the same degree. This cycle is different, and I'll try to explain why.
We're at an unusual juncture in the history of commerce. Call it the "tweener phase," a transition period as we move from one economic paradigm to an entirely new one. My guess is that we won't be a fully connected world (ultra-high speed connections everywhere on the planet) until the mid-2020s. It'll be a decidedly different economic ecosystem when we get there -- flatter, tighter, more transparent, largely shorn of inefficient intermediaries.
In the meantime, we're in a chaotic tweener phase as we leave one paradigm for another. And that's one reason why I consider myself lucky: It's the Wild, Wild West out there, the last great bull market we'll ever see. Yes, I said last. The world I imagine in 2025 and beyond is much more efficient, and it's likely to be marked by competitive convergence. We'll still have oscillation, just a lot less of it. The distribution of outcomes will be tighter, as intelligent tools are widely available to one and all. The bottom line: We'll be doing a lot fewer stupid things in the future.
But I'm getting beyond the scope of this piece, which is intended to explain what's happening today; that is, we have a competitive landscape marked by upheaval and disruptive change. As one who enjoys studying operating models, this is as fun as it gets (the 1990s were snoresville compared to now). I get to watch and analyze multiple battles for survival and, truth be told, it's not difficult to distinguish the winners from the losers. Simply put, the winners are those companies who best "fit" the new ecosystem.
The best fit doesn't mean biggest. Best Buy (BBY), the biggest player in consumer electronics, was ranked as the most admired retailer just a few years ago. Now it's dead man walking. As in, no chance. Best Buy's operating model fit the previous ecosystem beautifully. They quickly ascended to the top, used scale to solidify its position, and harvested many billions in cash profits. Take a bow, Best Buy. In your day, you guys were bad ass.
Today, though, Best Buy looks more like roadkill. The model is ill-fitted for the new economy. And it can't reinvent its model because it can't reinvent its cost structure. Here's all investors need to know: Best Buy has to levy markups of 32.4% on wholesale cost just to break even; that's no profit, it just pays the bills. Online competition can make a profit with a 5% markup, 15% if you include shipping.
Anybody with a pulse should be able to figure out the ultimate denouement here. There are more efficient ways to distribute consumer electronics, and there's nothing founder Richard Schultze can do about it. Private equity isn't stupid. They studied the model and concluded the same thing. It's just bad luck for Best Buy. The competitive landscape changed overnight, and it went from an advantaged position to structurally and permanently disadvantaged.
Investors should pay attention to Best Buy, because you'll see variations of this story repeatedly over the next several years. Pillar by pillar, a new economic paradigm is being put in place. And, as a consequence, we'll witness destruction of asset value coincident with tremendous wealth-building opportunities. Big winners and big losers. To the skilled stock picker, consider yourself lucky. This is as good as it gets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.