What ponds are you fishing in?

There is a common American (is this universal? I don't know) expression that asks "would you rather be a big fish in a small pond, or a small fish in a big pond."  The implication is if you find a small pond it could be rather easy to become an expert, rather than trying to be the biggest fish in a very big pond.

Niches fascinate me, most investors would agree that almost all successful businesses have a niche that they actively exploit.  Some companies grow to the point where they have economies of scale either in their branding or in their network where a niche is no longer needed.  Wal-Mart doesn't need a niche, they have the scale to crush any local competitor.  But a local grocery story that wants to compete with Wal-Mart needs to differentiate themselves.  A local store might play up their local-ness, or carry high end organic brands, or offer superior customer support, or even locate themselves in a better location.  But they have to do something different, if they advertise that they will beat any of Wal-Mart's prices they won't last much longer than their Grand Opening.

The concept of a business having a niche is well accepted amongst investors.  The concept of having an investment niche doesn't receive as much attention.  I've had a number of conversations with successful investors recently and this idea of investment niches really struck a chord.  It might seem strange for me to say that because my blog is the epitome of a niche, I mostly write about net-nets and other tiny deep value stocks.

The investors I talked to all know their strengths, whether it is unlisted stocks or small banks.  They work on knowing a small area better than almost any one else, and with that they end up with an investment edge.  That's one way to exploit a niche, find one and become the expert of it.

Another way to exploit an investment niche is to find an area of the market that others don't care much about.  This is how I approach my international investments, in many foreign markets there simply aren't enough investors who care about the smaller stocks.  An example of this would be French small caps, most investors in France care about the larger stocks and foreign markets leaving their small caps under followed and neglected.  Another example is Japanese small cap net-nets, a neglected market, a neglected segment, and net-nets, a niche unto themselves.  I don't face much competition when investing in a Japanese net-net.  Conversely most investors worldwide are looking at US stocks, so when looking at US stocks I bury myself into tiny holes most avoid, small companies, often very small.

Buffett's circle of competence comment gets a lot of use, people will say things like "oh fast casual restaurants in the Mid-Atlantic aren't in my circle of competence, I only know fast casual in California, know of any good books to get up to speed?"  I believe niche thinking is more valuable, I'd rather be the person who knows everything there is to know about unlisted stocks, or contingent value rights, or something, rather than building up a circle of competence that's the same as many others.

I want to extend this post beyond investing because I think it's very applicable in life.  The way to provide value to an organization or clients is to do something very specific very well.  I remember early in my career receiving some bad career advice.  A boss told me I shouldn't focus on any specific practice area because my skills could become outdated and I'd be pigeonholing myself in a very narrow area.  A few years later after leaving and working at a number of other companies I realized that advice was wrong.  Experts are paid handsomely and are sought after, no matter how esoteric.  Companies don't only run, they thrive on ancient tools and processes.  There is an enormous skill shortage for people who know things very well, instead we have multitudes of employees who all know the same basic knowledge, and not much beyond it.  Even stranger a person who is an expert in a niche can be terrible in every other aspect of their job.  I have worked with many people who are hands down experts in one very critical irreplaceable aspect of their job, and barely function otherwise.  Yet I've seen executives fall all over themselves to keep these people in place.  I'm not saying this is good behavior, but I'm saying you don't need to be a top performer in all aspects of your job, find an expertise, excel at it, and if you can perform at an average level for everything else you will do well.

It's possible to find a niche by examining what you do daily, or the things you're interested in, but that's the tough route. I think a niche often finds you.  When I decided to start this blog over three years ago I had no idea where it would be today.  I set out to record my thoughts on various investments I was researching.  I loved investing in net-nets and low P/B stocks, and was intrigued by special situations, there was a lack of that sort of investment writing on the internet, so I started filling the void.  Over the past three years I've solidified my niche, there are very clear categories of stocks that I feel I understand very well, and others I punt on because I know nothing more than what a new graduate might.

Find a void and work to fill it.  One more parting thought on this.  Many people work to become experts at something but do it privately.  I don't know of any private experts, but I know of plenty of public experts.  Some are afraid to speak out about their knowledge because they're afraid someone else will steal it or will surpass them.  The truth is most people aren't passionate about the same things you are, but they can learn a lot from what you're passionate about.  Secondly I'd be honored if someone learned from me and then far surpassed what I accomplish.  Teachers teach to impart their knowledge on others, if they wanted to remain smarter than their students they'd stay quiet.