Sunday Briefing: On economies of scale, economies of scope, a mental model for business, and Chewy

Sunday Briefing: On economies of scale, economies of scope, a mental model for business, and Chewy

Welcome to the Sunday Briefing newsletter where I share some of the interesting lessons in life, business, and investing that I’ve come across during the week.

Latest on Junto

It’s my birthday today! I planned on publishing my Disney write-up to members today but it still needs some editing so it will come out tomorrow. Keep an eye on it—it’s the biggest write-up yet.

One article was published on Junto during the week:

Picking stocks is like reading books. Remember this book reading strategy as you flip through those annual reports.

What I’ve been reading

Economies of scale, economies of scope.

As a first approximation, you could say that economies of scale result from learning the engineering, while economies of scope result from learning the marketing. The first is primarily a one-front war between a business and nature. The second is primarily a two-front war where a business fights nature on one front, and market incumbents on another. As an aside, both kinds of learning are war-time learning: they proceed in an environment where failure equals death for the firm.

A mental model for business people.

[…] we found that those who show considerable and consistent talent in business have such a mental model, shown in predictable ways of making use of information. Leveraging our relationships with companies and clients, we had unusual personal access to study a large number of highly placed leaders. Doing in-depth studies of talented business leaders who were repeat successes—even in very challenging markets—and who had risen to very high positions (such as chairmen of large corporations) and maintained that level of position even as business itself has grown much more complex, we discovered a shared mental model among all of them.

Company of the week

The company of the week is Chewy Inc. Chewy is a fun exercise to value, either as an unstable margin convergence problem or on a unit economics basis (either way should yield the same value). I get an intrinsic value per share around the mid-70s.

You can download the full model here and make your own assumptions (membership required).

Chewy stock valuation

Quote of the week

Warren Buffett on intrinsic value.

“I would say that if it’s a really wonderful business, we probably come up with higher intrinsic values than most people do.”

A thought

Reading is like breathing in, writing is like breathing out.

Have a great coming week,
Oliver Sung

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