In one sentence: Square co-founder Jim McKelvey explains his idea that rare, dominant companies are forced by their circumstances to solve many problems differently, forming an "innovation stack" that rivals, even Amazon, struggle to copy. He also gives views on CEOs, disclosure and staying within what you understand.
Key ideas
- The Amazon attack. When Amazon copied Square's product and undercut its price, Square survived by simply continuing what it was doing. That sent McKelvey on a three-year research project into why. [02:00–05:00, 21:00–23:00]
- Bank of Italy as a mentor. He picked a non-tech example, a produce vendor who founded the Bank of Italy (later Bank of America) to widen access to banking, to avoid technology effects like viral growth hiding incompetence. [03:00–07:00]
- Creating, not disrupting. Square didn't kill card companies. It built a new market. McKelvey would rather invest in companies alone in the elevator than elbowing into a crowded one. [07:00–10:00]
- Copying is the right default. When a problem has been solved, copy the solution. Phil's whole course is about cloning Buffett and Munger. A stack arises only when you're locked out of the market, or the problem is new, so you have to do everything differently. [10:00–16:00]
- What a stack looks like. Southwest: cheaper airports, one class of service, boarding in batches, fast turns, only 737s (so crews and parts are interchangeable), no meals, a different reservation system. Many linked differences, not one trick: Square had about 14, Southwest about 20, Bank of America around 25 (his figures). [16:00–23:00]
- How to spot one as an investor. Look for a company doing ten or more things differently, not one or two. By IPO the stack is usually already built, but a good stack keeps protecting it, as with Square's later gains (his figures). [18:00–20:00]
- Stacks can be abandoned. Southwest after Herb Kelleher raised prices faster than rivals and gave up its low-price advantage. McKelvey wouldn't buy it on that basis. IKEA keeps prices low to keep the moat. [12:00–14:00, 24:00–26:00, 37:00–39:00]
- Not the Buffett setting. McKelvey says stacks appear in changing technical businesses, whereas Buffett and Munger buy after a moat is proven. [23:00–25:00]
- Disclosure and stakeholders. Phil asks whether the CEO owes owners enough information to estimate value. McKelvey says Square puts employees, then customers, then shareholders, and that rules can be obeyed while hiding things (Enron's bad news was technically disclosed). [32:00–37:00]
- CEO succession. Boards copy the stereotype of a CEO, so you get mercenaries who optimise their pay. McKelvey's alternative: promote a passionate person from several levels down, accepting a short-term Wall Street penalty. [39:00–43:00]
- Invest only where it is obvious. He invests only in what he knows so well it is obvious (Microsoft, after seeing it beat his fellow startups). If you don't understand something, he says, 80% of the time someone is hiding something. Balance humility with willingness to trust your own view. [44:00–48:00]
How it maps to RuleOne
- A "stack" is a way of explaining a very high, steady ROIC on a stock page. The numbers show the result; the reading of the 10-K shows whether the cause is still there.
- The CEO and disclosure comments are Management-step questions, to be answered in the shareholder letter and proxy.
Buffett, Munger and Graham links
- Buffett's expectation that a CEO provide the owners enough information to value the business appears in his Owner's Manual (Berkshire). Phil contrasts Munger's Daily Journal.
- Buffett's well-known comments on airlines as capital destroyers (1990s Berkshire letters) are the backdrop to the Southwest discussion.
- "Stay inside your circle of competence" (Buffett, 1996 letter) matches McKelvey's rule about what he invests in.
Words to know
- Innovation stack: a set of interlocking solved problems that give a company a hard-to-copy advantage.
- Network effect: a product gets more valuable as more people use it.
- Stakeholder orientation: running the company for employees, customers and others besides shareholders.
Try this
Choose a company with a strong moat on All stocks and list the things it does differently from peers. If you can name only one or two, ask whether the moat is really a stack, or just a single advantage that could be copied.
Check yourself
- Why does McKelvey say copying is usually right?
Answer
If someone has solved the problem, the best solution is to copy them. Stacks arise only when you can't copy. - What made Southwest's stack, according to him?
Answer
Many linked choices (cheap airports, one aircraft type, batch boarding, quick turns, no meals) built toward low fares. - Why wouldn't he buy Southwest or Bank of America in 2020?
Answer
Management had dropped much of what made the stack work.
Short quotes
"If I can't understand something, probably 80% of the time it's because somebody's trying to hide something from me." (Jim McKelvey, ~46:30, auto-transcribed)