why is amazon worth 1.8 trillion dollars today if we had to boil down the company's success to
one word it would be this optionality so what does optionality mean and how can investors use
optionality to invest successfully we'll tell you everything you need to know about this incredibly
important business concept next my name is brian feroldi and my name is brian stoffel
thanks to quartr for sponsoring today's video brian optionality can be a difficult word to
wrap your head around when somebody says what is optionality how would you respond well
i would respond by giving them a very simple definition optionality is when you decide to
try something out like let's say painting your room yellow and if it doesn't work out like it
didn't here it's not the end of the world because you can always change it but if it does work out
the results can be enormously beneficial if we take that concept and apply it to business terms
i personally think of optionality as a company's ability to launch new products or new services
that open up new revenue opportunities for the business and if a company can do that successfully
it can drive immense shareholder returns now brian it's important to provide some context about where
optionality fits into a business's strategy when i think about where optionality fits in i'm reminded
of something that nassim taleb calls the barbell technique that is where a company will devote
80 to 90 of its resources more conservatively what that means is that it's investing in a business
that has a predictable upside and limited downside that's usually means it's also protected by a wide
moat but on the other end of the barbell the company is willing to take more risks with
just 10 to 15 percent of its resources these risks are worth it because the upside is unlimited and
because such a small percentage of resources are being devoted to it the downside is largely capped
and contained this barbell technique applies to more than just investment decisions that companies
are making you can also apply the same concept to thinking about your job or your career on the one
hand you can devote a significant amount of your time to a salaried normal five job that's safe
secure and provides a predictable income but you can also use a small amount of the time on nights
and weekends to become a stand-up comedian or to start a small business those things don't
necessarily have an immediate payoff but they hold huge long-term potential if they work out you
could also take this same framework and apply it to your investments in fact this is officially how
nasim talib talks about creating an anti-fragile portfolio where you devote 80 to 90 of your
resources to incredibly safe investments like cash or bonds but you take that other 10 to 15
percent and you invest in things that are far more volatile things like options or cryptocurrencies
or biotech stocks where the chance for success might be small but if you hit it has unlimited
upside potential i think of that optionality almost as if playing the lottery you're taking
a small amount of money and you have the chance to get a huge payoff if it works out now let's
cherry pick an example to show how this might work out say in 2015 you had a million dollars in
your nest egg you decided to put 900 000 of that in cash and bonds which is really smart if you
want to preserve what you have but you take that leftover hundred thousand and you invest in say
bitcoin well through the first three years that you make this investment you're able to maintain
your cash balance of course inflation will end to eat into it a little bit but the fact of the
matter is you know you can't lose that the bitcoin on the other hand starts appreciating a little bit
which is kind of nice but then 2018 hits and that small investment you made in bitcoin is now worth
5 million dollars now of course because that side of the barbell has volatile investments the next
couple of years might show losses but then 2021 hits post pandemic and it goes up to 10 million
dollars the important thing to note about this is that all the while you only risk losing 10 of
what you put into it when you reach 5 million in 2018 or 10 million dollars in 2021 you can
change it so that you're still holding 90 of what you have in cash and just devoting a little bit
to that other end of the barbell in this case it was bitcoin as you said at the beginning this is
obviously an extremely cherry-picked example where the thing that you put your money into really
worked out that's not important what's important is the concept that we're trying to hammer home so
let's use this same framework but now apply it to companies that we can invest in we started out by
talking about amazon so let's go back to amazon when the company launched in the 90s this is what
their web page looked like never would anyone have guessed that amazon is the company that provides
cloud services to a huge portion of the world but also delivers maybe up to 50 of what your family
buys in a given year how did we get there let's examine it rewind the clock to the late 1990s
when amazon was first getting started and what did it sell books that was its core business that was
growing rapidly and clearly had big potential and amazon was devoting most of its resources
to feeding that business but at the same time it was taking a small amount of its capital and was
putting in high-risk projects such as auctions and third-party merchants well guess what that
auctions business that did not work out but that third party merchant's business sure did so then
we can fast forward a number of years and now we see that yes books are still on that left side of
the barbell but because third party merchants was so successful it shifts over and it's on that side
as well but the company decided to keep taking those risky bets and it decided to invest in
a fashion retail concept or amazon web services or amazon prime or fulfillment by amazon well we know
that that fashion retail concept didn't work out but those other three were enormously successful
over time those experiments were clearly paying off and amazon continued to plow resources into
them but it also kept on innovating because this optionality concept was working so well
so we saw new innovations come along such as quincy and original video content that we now
know as prime video or how about the fire phone or how about amazon wallet does the fire phone or
amazon wallet not ring a bell that's because those projects didn't work out but i'm quite confident
that you have heard of amazon prime video so what happens when we invest in a company that
shows this level of optionality well a simple ten thousand dollar investment in amazon back when in
public in the 90s is worth almost 20 million dollars today amazon is obviously an extreme
outlier but it shows how the company's commitment to continually innovating and investing in
optionality has really paid off for its long-term shareholders it's important to note that this can
happen with much smaller companies as well one such companies acts on enterprises it used to be
known as taser international and for the first 20 years of its life as a company it simply produced
stun guns for police forces starting in 2010 the company started to invest in other side projects
such as body cameras a software platform called evidence.com and another product called axon
fleet each of these products were experiments when the company first started them but over
time it became clear that they were seeing gradual market adoption and they became key parts of the
company's core business fast forward to today and the company is not taking the pedal off of
its optionality it is creating services like axon records which can autofill paperwork for police
officers to spend more time in the community or axon dispatch which allows a dispatcher to see
where an entire force is in real time the fact of the matter is these are small experiments
that when they hit make an enormous difference just like we saw with amazon if you invested ten
thousand dollars in axon when it first came public that ten thousand dollars has grown into more than
three million dollars today key reason is the company's commitment to optionality now axon and
amazon are obviously two cherry picked examples but when i think about some of the biggest winners
of all time that i've ever owned all of them have this optionality concept built right into the core
business model so if optionality is so important to identifying the question then becomes well
how do you identify it before it becomes blatantly obvious to everyone else in the market before we
get into that we wanted to give a shout out to this video's sponsor quarter with quarter
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thanks corder for sponsoring the video all right brian so how can investors identify
optionality before it happens well one key way that we think investors can do just that is by
looking at a company's mission statement you and i very focused on a company's mission statement
more so than i would say 95 of other investors one reason why is because we view a mission statement
almost as like a company's north star or it's like a compass that employees can use to make decisions
about what they should do next and brian if we look at some of the companies we talked about
today we see that play out since day one amazon's mission statement has been to be earth's most
customer-centric company and if you think about their evolution through time they saw industries
where the incumbents were not customer-centric and they introduced solutions that were more customer
centered note that amazon's mission wasn't to become earth's biggest bookstore it was to
become earth's most customer-centric company the company wasn't tied down to one specific strategy
it left the doors open for the company to explore any avenue that it wanted to we see the same
thing when we talk about our second company axon enterprises the company's mission was to protect
life tasers obviously did that by offering a solution to the bullet however body cameras
and software solutions accomplished that very same goal a great more recent example of this
is tesla tesla's mission since day one has been to accelerate the world's transition to sustainable
energy it wasn't to build the world's best sport cars the company is on a mission to transition
the world away from fossil fuels and doing so gives this company unlimited room to explore
new products and services after the mission statement we think another way that investors can
figure out if a company has optionality or not is by looking at the company's own history and asking
themselves had this company demonstrated a track record of launching new products and services
if you go back to a company like wix for example which allows people to create their own websites
and e-commerce presence you see that from 2015 to this year the company has rolled out innumerable
products that its users can use to do a better job of selling themselves online another great example
of this concept that we see today is hubspot hubspot started out as just a tool for marketing
professionals but over time it has since evolved to adding tools for sales people service people a
content management system and more the company has demonstrated a clear history of rolling out new
products and services that opened up new market opportunities for the company no surprise both of
these company stocks have spanked the market since they came public brian we know that looking for
companies that have optionality is a lot different and probably more difficult than simply looking at
companies financial statements but we think it's worth the effort over the long run for sure i love
stumbling upon a new company that i've never heard of before that clearly shows signs of optionality
especially if that company is small and growing quickly that begs the question
what companies do you think have clear signs of optionality today we would love to research them
ourselves let us know in the comments section below what companies you think have optionality
built into their dna we hope this video is helpful and helps you to invest better brian's out