Charlie Munger used the surfing metaphor in Elementary Worldly Wisdom to represent the idea of some large business force that developed, which a company was able to ride to grow much bigger itself. He writes
When these new businesses come in, there are huge advantages for the early birds. And when you’re an early bird, there’s a model that I call “surfing” – when a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he gets off the wave, he becomes mired in shallows.
Watch this amazing video to see how a surfer catches a huge wave in Hawaii.
1. National Cash Register
John H. Patterson was a small retail merchant who did not make any money. One day, somebody sold him a crude cash register which he put into his retail operation. And it instantly changed from losing money to earning a profit because it made it so much harder for the employees to steal. Excerpt from Elementary Worldly Wisdom
But Patterson, having the kind of mind that he did, didn’t think, “Oh, good for my retail business.” He thought, “I’m going into the cash register business.” And, of course, he created National Cash Register. And he “surfed”. He got the best distribution system, the biggest collection of patents and the best of everything. He was a fanatic about everything important as the technology developed. I have in my files an early National Cash Register Company report in which Patterson described his methods and objectives. And a well-educated orangutan could see that buying into partnership with Patterson in those early days, given his notions about the cash register business, was a total 100% cinch.
Munger tells that every investor should be looking out for these kinds of opportunities.
In a long life, you can expect to profit heavily from at least a few of those opportunities if you develop the wisdom and will to seize them. At any rate, “surfing” is a very powerful model.
2. Les Schwab Tires
In his speech on ‘Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs‘ – Munger asked the following question.
There’s a tire store chain in the Northwest, which has slowly succeeded over 50 years, the Les Schwab tire store chain. It just ground ahead. It started competing with the stores that were owned by the big tire companies that made all the tires, the Goodyears and so forth. And, of course, the manufacturers favored their own stores. Their “tied stores” had a big cost advantage. Later, Les Schwab rose in competition with the huge price discounters like Costco and Sam’s Club and before that Sears Roebuck and so forth. And yet here is Schwab now, with hundreds of millions of dollars in sales. And here’s Les Schwab in his 80s, with no education, having done the whole thing. How did he do it?
As usual Munger answered the question. Les Schwab surfed the wave. He tied up with the Japanese who had a zero position in tires and they got big.
I don’t see a whole lot of people looking like a light bulb has come on. Well, let’s think about it with some microeconomic fluency. Is there some wave that Schwab could have caught? The minute you ask the question, the answer pops in. The Japanese had a zero position in tires and they got big. So this guy must have ridden that wave some in the early times. Then the slow following success has to have some other causes. And what probably happened here, obviously, is this guy did one hell of a lot of things right. And among the things that he must have done right is he must have harnessed what Mankiw calls the superpower of incentives. He must have a very clever incentive structure driving his people. And a clever personnel selection system, etc. And he must be pretty good at advertising. Which he is. He’s an artist. So, he had to get a wave in Japanese tire invasion, the Japanese being as successful as they were. And then a talented fanatic had to get a hell of a lot of things right, and keep them right with clever systems. Again, not that hard of an answer. But what else would be a likely cause of the peculiar success?
3. Steve Jobs – On catching tech’s next wave
In 2008 Steve Jobs gave an exclusive interview with Fortune. He tells
Things happen fairly slowly, you know. They do. These waves of technology, you can see them way before they happen, and you just have to choose wisely which ones you’re going to surf. If you choose unwisely, then you can waste a lot of energy, but if you choose wisely it actually unfolds fairly slowly. It takes years.
Jobs wanted to own and control the primary technology for consumer electronics. The primary technology was operating system software. Apple was pretty good in operating system software. At that time there were many handset manufacturers. But none of them were really strong in software. The result: iPod, iPhones and iPads.
So we could write all these different kinds of software and make it work seamlessly. And you ask yourself, What other companies can do that? It’s a pretty short list. The reason that we were very excited about the phone, beyond that fact that we all hated our phones, was that we didn’t see anyone else who could make that kind of contribution. None of the handset manufacturers really are strong in software.
4. Sunil Mittal
Sanjay Bakshi, a visiting professor at MDI, Gurgaon, India talks about
Surfing as a mental model. He gave an example of Sunil Mittal, Chairman and Group CEO of Bharti Enterprises. Mittal rode the GSM wave and became one of India’s richest men.
A lot of business fortunes are made because someone happened to be in the right place at the right time – i.e. luck.
1976 – At the age of 18 started is first business by borrowing Rs 20,000 from his father. His first business was to make crankshafts for local bicycle manufacturers
1980 – Along with his brothers he started an Import Enterprise named Bharti Overseas Trading Company. He sold his bicycle parts and yarn factories and moved to Mumbai.
1981 – Purchased importing licenses and imported thousands of Suzuki Motors’s portable electric-power generators from Japan. The importing of generators was suddenly banned by the then Indian Government. He writes
In 1983, the government imposed a ban on the import of gensets. I was out of business overnight. Everything I was doing came to a screeching halt. I was in trouble. The question then was: what should I do next? Then, opportunity came calling. While in Taiwan, I noticed the popularity of the push-button phone — something which India hadn’t seen then. We were still using those rotary dials with no speed dials or redials. I sensed my chance and embraced the telecom business.
1984 – Started assembling push-button phones in India. Bharti Telecom Limited (BTL) was incorporated.
1990s – By early 1990s, Mittal was making fax machines, cordless phones and other telecom gear.
1992 – He successfully bid for one of the four mobile phone network licenses auctioned in India. One of the conditions for the Delhi cellular license was that the bidder have some experience as a telecom operator. Mittal had the experience.
Bharti Airtel was formed. During that time India witnessed an unprecedented increase in the mobile phone usage. Mittal surfed the wave and the rest is history.
Information Technology Boom
Information Technology (IT) Boom started in India during mid 1990s. Most of the people who happened to study computer science got into jobs that offered high salaries. Until mid 2000s the difference in salaries were 4x to 5x compared to someone working in non IT jobs. In recent times the difference in salaries had come down to some extent. Lots of people surfed this IT wave and got benefited immensely. It is not that people working in the IT industry are geniuses. Luck plays a huge role in outcomes.
You got to be at the right place at the right time.