Boring is the new interesting. I’m often asked what I’m looking for when I invest, and usually I prefer boring businesses. Whilst it may be very exciting that “everyone’s talking about” a firm that allows you to send a self-deleting picture of your reproductive organs to someone, it doesn’t make an investment case. I’m not interested in a firm which doesn’t make money, and doesn’t know how it *could* make money, even if it’s exciting that everyone wants to send pictures of their genitals around.

What I’m looking for is businesses that can actually make money. This may seem terribly old fashioned and fuddy-duddy, but here’s why making money is important (can you believe I need to explain this??):

  1. You can’t always sell your shares.  Making a dividend means you get a return.  Radical, but true – some companies pay dividends.
  2. Even if you *can* sell your shares, the person buying them might realise that *they* might not be able to sell them.  Having shares that can pay a dividend mean they’ll pay more.  It also means that more people may be bidding to invest – thus pushing the price up.
  3. If a business makes money, it *can’t* go bust.  Therefore, there’s no ‘runway’, ‘burn rate’ or any other nonsense terms used to explain and/or excuse a lack of profit.
  4. Because you can’t go bust, you can hold out for the best investment deal, thus pushing the price up.

This is all very quaint and Victorian, but I happen to think it’s important.  Everyone may dance and clap when the genital-sharing company gets a massive offer, but there are many other comparable businesses which *were* the ‘next big thing* – until they weren’t.  MySpace, Bebo, etc., etc. etc.  These were all backed like Tulip Mania, and the biggest news they ever had was the catastrophic losses for their investors.  Sure, early stage backers may have cashed out, but claiming that as an upside is like playing pass-the-parcel with a grenade.  The only way you win is by not holding the present when the music stops – and that’s not an investment strategy.

So what’s different about a boring business?

  1. It’s boring.  It should do something like letting you book a train ticket or host a video or buy some new socks.
  2. It makes money (or looks like it will).  This involves selling someone something they want to buy.  Note ‘buy’ as opposed to ‘do’. If you’re not dealing with a flow of cash, it’s very hard to take cash from people.  N.B. Advertising revenue doesn’t count as money, unless you can prove it’s enough money for your model to work.  (This *must* include an allowance for the fact that people get bored of new ad formats quickly.)

Of course, that’s not all that’s important.  All the other considerations such as addressable market, team balance, etc. still apply.  But there’s one other important rule:

Don’t be plumbing

Plumbing is boring, but it’s a commodity.  People don’t go to TESCO because of its plumbing.  They go because of its brand.  The company which supplies TESCO’s plumbing doesn’t own the customer.  They will always operate in a competitive market.  If you’re selling socks or booking train tickets or whatever, you need to own a relationship that you can profit from.  Otherwise, you’ll never make profits big enough to make anyone jealous – because as soon as you do, they’ll try and eat your lunch.  And they’ll probably succeed.

So do be boring, but don’t be plumbing.