Yi-Chen Lu's Newsletter No. 2

Measuring the Moat, The Law of Leadership, Behind the Interrogation Room

Hi everyone,

Greetings from Vancouver!

I am very excited to welcome my new subscribers and thank you all so much for reading.

Here's a snapshot of everything in store for this issue:

  • Measuring the Moat

  • The Law of Leadership

  • Behind the Interrogation Room

  • GoodRx

Let's jump right in!

Measuring the Moat

For the past 2 weeks, I have been reading a paper written by Michael Mauboussin and his colleagues. It’s about the frameworks and analyses for measuring a company’s moat.

Going through it day by day, I have learned a few things about sustainable value creation and ways to evaluate a company's ability to create sustainable competitive advantages.

Here's what I've learned so far:

The legend of investing, Warren Buffet, once said on June 12th, 1994:

The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.

In a nutshell, he wants to buy businesses with prospects for sustainable value creation. Going back to the moat analogy, the moat should be big, deep, and defensive enough to fend off all competitions, allowing the company to sustain its competitive advantages for a longer duration.

So how do we measure a company's moat?

Bottom line: Even the best industries include companies that destroy value, and the worst industries include companies that create value. Therefore, the strategic analysis needs to be on both the industry level and the company-specific level. This way, it allows investors to get a more accurate picture of the company's sustainable value creation.

One key concept to highlight is the Regression toward mean, which can be really powerful in analyzing sustainable value creation.

Regression toward mean: an outcome that is far from average will be followed by an outcome that has an expected value closer to the average.

Note that a company's moat and the ability to sustain that moat for a very long time are key to sustainable value creation. So the slower the regression toward mean is, the better it is to create sustainable value.

The Law of Leadership

I usually have a book on my nightstand, which I read about 15-30 minutes before going to bed. That book is currently The 22 Immutable Laws of Marketing by Al Ries and Jack Trout. It lays out the basic foundations behind extraordinary marketing.

Let's start with the first law of marketing—the law of leadership.

The leading brand in any category is almost always the first brand into the prospect's mind.

When you think about ibuprofen, what is the first brand that pops into your mind? Advil? What about the second brand? Most of us will be stuck here.

That's the power of the law of leadership: being the first in your category.

There are 2 reasons why being the first leading brand is so important:

  1. Your brand name becomes generic. For example: “Can you buy me a coke?” could mean Pepsi-cola too. Another great example from my friend Erik Newhard: "Googling something" means doing any internet search, even in a different search engine. 

  2. The first brand is not only usually the leader, but the sales order also comes first. It's like when websites are ranking for Google Search Engine. The majority of the clicks happen in the first 3 rankings.

Of course, there will be exceptions. Not all first brands are going to be successful. The timing has to be right too. Your first national newspaper may be too late for an era when the television is rising. And oftentimes, some first ideas are just bad.

But what if my brand is not the first in the prospect’s mind. Am I forever doomed? Well...that's when the second law of marketing comes into play. Stay tuned for this next one, which I will discuss in the next issue.

Behind the Interrogation Room

Source: Criminal UK Colin Hutton/Netflix.com

I wanted to share a new show I’ve started watching on Netflix called Criminal UK. I have to say this is my favorite show on Netflix by far. Unlike other shows out there, a majority of the scenes happen in the same interrogation room.

Each episode highlights a suspect. Each of them has a story to tell.

The acting of the suspects is superb. Each story is essentially a monologue. The audience gets to imagine the story in various ways.

With just the dialogues, every detail needs to be conveyed so well for the audience to follow along with the story. That’s why the non-verbal cues became so important in this type of show. When the suspect is fidgeting or rocking back and forth, it usually means that he or she is hiding something.

The tactics that the investigators use are also interesting. Sometimes, there is clear evidence, but sometimes they have to depend on their gut feelings. When it’s just a gut feeling, they need to get more stories from the suspect. To do that, they have to deliver their claims powerfully and confidently to trigger the suspect into talking. Once they start talking, the story pieces itself together. Oftentimes, that is also when the police start to spot the lies or the gaps of the seemingly logical story. In fact, most of the time, the story doesn’t line up with the evidence at hand.

And this is when the truth surfaces. I can’t recommend this show enough.

GoodRx

Source: GoodRx

Did you solve the last digital health trivia?

Read the following three statements and guess: which digital health company is this?

  • This digital health company went public recently.

  • The app helps consumers find lower prices on prescription drugs and other medical help.

  • Don't go to the pharmacy without checking drug prices on the app first. 

The answer is GoodRx.

GoodRx is a mobile app that lets you compare prices for prescriptions between different pharmacies, offering consumers free access to lower prices on their medication.

The company’s mission is simple but powerful: To help Americans get the healthcare they need at the price they can afford.

In their IPO announcement last month, I spotted a great line that perfectly summarizes the problem they are solving.

For anyone who finds healthcare out of reach, GoodRx is here to help.

—GoodRx CEOs, Doug Hirach and Trevor Bezdek

In the next few weeks, I will be writing my first deep dive piece into this recently IPOed company.


Digital Health Trivia

Okay. So it’s time for the next digital health trivia question:

In Canada and the United States, people are experiencing high levels of anxiety and depression. Not surprising given the uncertainty and sense of loneliness from isolation during the pandemic.

There are digital health companies out there right now tackling the emerging mental health crisis that the pandemic has brought upon us.

Which of the following digital health companies does NOT fall into this category?

A. Lyra Health

B. Viome

C. Ginger

D. Kumanu

I will reveal the answer in the next issue. Stay tuned!

Thanks again for reading.

Talk soon,

Yi-Chen (Jenny)

P.S. I love to hear from you. Feel free to hit reply and let me know what you think about this issue.