Lyn Alden is the founder of Lyn Alden Investment Strategy, through which she has been providing research, both publicly and privately, since 2016. Her research methods have received global renown and helped her amass more than 165,000 followers on Twitter [TWTR].
Throughout Alden’s career, she has contributed to Business Insider, MarketWatch, CNBC, The Street and Time’s Money Magazine, with her particular area of focus being on the intersection between engineering and finance.
In this episode of Opto Sessions, however, the discussion turned to an intriguing theory that has come into play a lot in recent months — the network effect.
Listen to the interview:
“Companies have economic moats, or at least really high-quality companies. This was a topic popularised by Warren Buffett,” Alden tells Opto Sessions. “If a company finds an opportunity to have really good returns on invested capital, it’s natural that other companies will want to come in and … take some of those returns.”
Alden explained that this increases competition and drives down the average return of capital for the industry. It is the companies with an edge that prevents that — those that avoid success being replicated and displaced — that investors like Buffett look for.
“You can have a strong brand, economies of scale, unique assets — things like that. One of the most powerful ones happens to be a network effect, which is a phenomenon where the more people use it, the more valuable it gets per user,” she explains.
“You can have a strong brand, economies of scale, unique assets — things like that. One of the most powerful ones happens to be a network effect, which is a phenomenon where the more people use it, the more valuable it gets per user”
“Therefore, it becomes like a sucking force. It just sucks everyone into that platform, [making] it really hard to start up as a competitor.”
Alden points to Facebook [FB] as an example, which has reached critical mass “to the extent it just became the de facto social network”.
As such, she says, it’s become almost impossible to create a better version of the business. Even with a better interface or privacy improvements, it would still be hard to draw away.
“[As a competitor], you have trouble building a user base because there are no users there. It’s just really hard to get that flywheel started. That applies to exchanges around the world and to credit card companies, where merchants only accept popular ones and users only use cards that are accepted by merchants,” Alden says.
“It’s just really hard to get that flywheel started. That applies to exchanges around the world and to credit card companies, where merchants only accept popular ones and users only use cards that are accepted by merchants”
“We’ve seen over the past decade, in particular, that the emergence of network effects has been arguably the most powerful mode around.”
To hear more from Alden, including how the network effect applies to Bitcoin and where to look for undervalued stocks, listen to the full episode on Opto Sessions.
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