Counterintuitively, investing in sectors you don't professionally understand, like cybersecurity, can be more fruitful than investing in familiar consumer brands. The thesis can be built on strong, secular tailwinds and growing addressable markets, which are often more durable than the moats of consumer-facing companies.
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Focusing only on trendy sectors leads to intense competition where the vast majority of startups fail. True opportunity lies in contrarian ideas that others overlook or dismiss, as these markets have fewer competitors.
The best investment returns in cybersecurity will come from startups tackling security for emerging technologies. New attack surfaces, such as those from Agentic AI, represent a 'blue sky problem' where a startup can build a category-defining company without facing incumbents.
While a strong business model is necessary, it doesn't generate outsized returns. The key to successful growth investing is identifying a Total Addressable Market (TAM) that consensus views as small but which you believe will be massive. This contrarian take on market size is where the real alpha is found.
There's a paradox where simple, consumer-facing businesses (e.g., Chipotle, Lululemon) are easy to grasp but incredibly hard to invest in. Their low barriers to entry and susceptibility to fads make picking long-term winners a constant challenge, subverting the "invest in what you know" principle.
In your 40s, resist diversifying into areas you don't understand. Instead, invest 70% of your capital into your core area of expertise where you have an information advantage. Allocate 20% to adjacent opportunities and only 10% to "moonshot" ventures outside your competency.
Contrary to conventional wisdom, deep sector expertise can be a liability in venture capital. VC firm Felicis found that none of its 53 unicorn investments were led by an expert in that specific sector. Experts can be anchored to orthodox thinking, while generalists are better able to recognize and back disruptive, first-principles approaches.
Long-term returns are a function of capital supply and demand. Hyped areas like AI have a surplus of capital, competing returns down. True opportunities lie in being the "one banker for 1,000 borrowers"—investing in areas starved for capital, where your money commands a higher expected return.
An average stock's return is dictated more by external forces than company performance: 40% by the market and 30% by its sector, with only 30% attributable to idiosyncratic factors. This means correctly identifying a winning sector is nearly as valuable as picking the best stock within it.
Don't overlook seemingly "boring" industries like cybersecurity or compliance. These sectors often have massive, non-negotiable budgets and fewer competitors than glamorous, consumer-facing markets. Solving complex, high-stakes problems for large companies is a direct path to significant revenue.
Investor Mark Ein argues against sector-specific focus, viewing his broad portfolio (prop tech, sports, etc.) as a key advantage. It enables him to transfer insights and best practices from one industry to another, uncovering opportunities that specialists might miss.
