Why Investors Should Look for Companies With Many Ways to Win

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One of the great joys of teaching is watching a student really absorb the roots of a lesson -- not just a particular set of facts but fundamentals and processes that they'll be able to apply again and again. And while Motley Fool co-founder David Gardner might not have a classroom, there's no doubt that he does view himself, in part, as a teacher. It's not for nothing that the company's original motto was "Educate. Amuse. Enrich." Today, that's been updated to "Making the world smarter, happier, and richer," which obviously hits the same themes.

Earlier in May, the Motley Fool asked our Twitter followers, "What investment principles and ideas have you learned from David Gardner?" The answers were so gratifying to Professor G. that he's dedicating an episode of his Rule Breaker Investing podcast to a quick refresher course on those lessons. In this segment, frequent Fool contributor Matt Cochrane chimes in with the idea of optionality -- in other words, why you should buy companies with a number of possible future paths to success. Here's what that looks like in practice.

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This video was recorded on May 22, 2019.

David Gardner: And the next one, this is from my friend, Matt Cochrane, who writes for The Motley Fool, @FoolMCochrane on Twitter. Matt, it was great to see you and your family visiting us some weeks ago here in Alexandria, Virginia.

You wrote, what did you learn? "Buy companies with many possible futures or optionality." Here on Rule Breaker Investing, I've talked about that a fair amount in the past. Some of my favorite companies have lots of options. After all, if you start by selling books online but build a platform for e-commerce, where all of a sudden you could sell other things online, play it forward a decade or two, and all of a sudden, you might be selling everything online, as Amazon is today, seemingly. And it all came from a platform that was initially just built to sell books.

Amazon had many possible futures. It had, as I like to say, optionality, a lot of options, by having the world's leading e-commerce platform, even in its earliest days. Of course, Amazon has gone on to do some other amazing things, like Amazon Web Services, which we don't need to belabor here, we'll just say that adds even more options to what Amazon can do and become, and even more tactical things these days, like Amazon's new emphasis on single-day delivery, that represents just another capability that Amazon has built up over time, giving the company and its founder, Jeff Bezos, so many options in terms of how to grow, but in a way that people appreciate. I know some people probably don't like Amazon or think it should be broken up. I'm somebody who thinks that would be a real mistake. Amazon, from my standpoint, as a customer anyway, every day is adding convenience to my life, I bet to yours, to so many people globally. To me, it might be the brightest crown jewel in the American capitalism crown.

So much of this is looking for optionality, many possible futures. In fact, Matt, you went on to quote in that tweet, and I'll just read it, "The best businesses are able to evolve. Why does that matter? Well, just like in biological evolution, changes in external circumstances happen, and your organization needs to both be aware of those things and be adjusting itself to be relevant and/or successful and/or just survive into the next era by evolving. And one of the best ways that innovative companies manage to do this is, often, they have a second or third trick. And we call that, again, optionality. It means you have multiple possible futures."

Quoting from an essay I once wrote on the comparison between biological evolution and business evolution, and how you need to succeed and pass your genes on to the next generation. The most successful businesses do, just like the most successful species do, they survive, they procreate, they grow, they pass their DNA, in this case, the DNA of successful business thinking and execution, on to the next generation, by surviving, by being naturally selected -- thank you, Darwin -- by being naturally selected by, in this case, customers, who are naturally selecting that product or service, not that one, enabling those businesses to thrive. There's a lot of crossover, in my mind, between evolution in biology and evolution in business. And the most successful form of it in business results in many possible futures for companies and in optionality.

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