5 Ways to Maintain a Competitive Edge, No. 4: Be More Willing to Fail

Getting ahead isn't simply a matter of having a great idea, nor of being intelligent or improving your mastery in your chosen arena. The key is to focus on the edge that you can keep for the longer term. In this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by former Fool Morgan Housel to talk about figuring out what your sustainable advantages are, both in investing and in life. He lays out five possible advantages that you and the businesses you invest in might already have, or want to cultivate, in service of acquiring an edge. The fourth: accept that the possibility of big failures is a prerequisite for big successes.

A full transcript follows the video.

This video was recorded on Aug. 22, 2017.

Alison Southwick: No. 4: the willingness to fail more than your competition.

Morgan Housel: This is especially true for businesses. I think it's probably true for investors, as well, but especially for large corporations. It's the inability to want to do anything that doesn't equate to short-term profits, or instant profits I should say. They tend to punt. They don't want to fail.

Individual managers view it as career risk. Companies view it as [not making their] quarterly earnings. So, the desire to not take a risk sets them up for stagnation, and in a world that's always adapting and evolving into something new, if you are a company that's unwilling to take risk, you're probably going to get left behind.

I think two amazing examples of companies that failed better than anyone else are Google and Amazon. In my view I think Amazon is probably the most impressive company of the last 50 years and maybe the last century. It's just absolutely staggering what Jeff Bezos has been able to accomplish, especially just in the last 10 years.

And the root of that, I think, is his ability to take risk. And not just take risk, but his willingness to fail. Things like the Kindle Fire Phone, which by any definition was just a disastrous failure. They hardly sold any phones. Even when they were trying to sell them for a dollar, they couldn't sell them. A total failure.

And when Jeff was on conference calls -- and granted it's easier to do this when the rest of the company is super successful ...

Southwick: I was going to say. It's easy to fail when you have a massive war chest ...

Housel: When you have a lot in, but that goes both ways. The reason they have a massive war chest is because they've been willing to fail and that willingness let them find other business segments that ended up doing incredibly well. If you're never willing to fail, you're not going to find one of those segments that does really well.

When Bezos talked about the Fire Phone, I think most managers would say, "Oh, well, the market moved against us. Our suppliers didn't ..." They would try to either sweep it under the rug or pass blame. And Bezos's comment -- this isn't verbatim, but it's pretty close to it -- is when he said, "If you think the Kindle Fire Phone was a failure, you ain't seen nothing yet." He said, "We're going to have much bigger failures. I guarantee it."

That's just his mentality. I think that because he has that mentality, Amazon is going to keep finding new business segments that are incredibly profitable because they're willing to go out and take the risk that's needed to find those things.

Robert Brokamp: You've gone from the world of The Motley Fool -- that looks at publicly traded companies -- to where you are now, looking at privately held companies or private equity. And there's a big debate, now. Why is it that companies are more reluctant to go public or at least wait longer? Is part of it this whole having to meet quarterly earnings?

Housel: I think that's part of it, but the rebuttal would be that as companies grow and they're in the private equity space [so they're not start-ups -- they're established companies but they're privately owned] those companies do face earnings pressure. Maybe it's not quarterly. Maybe it's annually, but it's not a distinct difference.

There's often a viewpoint, sometimes, that if you're a private company you don't ever have to make your numbers again, and that's just not the case. Private owners of stocks want their companies to perform and sooner rather than later. So, I'd say the pressure is reduced when you're a private company, but it doesn't go away.

Why are so many companies staying private? The big statistics is that there are half as many publicly traded companies today as there were in 1995. The number of publicly traded companies peaked in 1995. I think it was 7,300 and now there's like 3,400. It's a huge reduction in the past 20 years.

And there are a lot of reasons for that. It's expensive to be a public company. You have the spotlight on you all the time where the 24/7 news media is always going to be seeing what's going on and wanting to write the big, headline-grabbing story of what's going on with the company's culture. So, the more public information you have, the more burdensome spotlight you have on you.

And as you alluded to, the quarterly earnings race for a public company can be really difficult. I think the big reason is there now is just so much private money out there that companies don't need to go public. There's just no need to do it. Twenty years ago there was no way that Uber or Lyft could stay private like they have now. There wasn't that much money in venture capital or private equity that would fund them to this point. They would have had to go public when they were still a really small company.

But now a company like Uber, which is valued at $70 billion in its last round, can stay private and can keep raising as much money as it needs to from private investors. There's just no need to go public, so there's no reason for a lot of companies to go through the rigmarole and the hassle of being a public company if there's no tangible benefit of doing so.

And that is, I think, only growing. The amount of money in private markets is growing so much that that trend, I think, will continue. And something that's happened just this year is SoftBank. A big financial company based out of Japan raised a $100 billion venture capital fund this year. And to put that into context, $100 billion is more than all of the IPO proceeds raised from 2010 to 2012 and that's just one fund. So, having that much money in private markets just means that big companies like Uber, Lyft, and Airbnb don't need to go public.