Invest Smart, Not Hard: Achieve Profitable Growth with Buffett's Philosophy

In the 1977 Berkshire Hathaway shareholder letter, Warren Buffett wrote:

“One of the lessons your management has learned . . . is the importance of being in businesses where tailwinds prevail rather than headwinds.”

Tailwinds and headwinds are commonly used in aviation. Headwinds blow in the opposite direction of the plane while tailwinds push the aircraft at a faster rate by blowing on the back of the aircraft.

That’s why it takes 6 hours to get from New York to San Francisco but only 5 to get from San Francisco to New York.

And they said I’d never learn anything from watching Airplane 2.

In business, headwinds make growth harder. Scenarios like:

• Infighting among management 

• Pending litigation 

• Feverish competition

• Government regulations 

All stymie a projects’ opportunity to generate outsized returns on capital. In other words…

Buffett sought investment opportunities where the wind was at their backs. Scenarios like:

• High scalability 

• Competitive advantages

• Proprietary assets

• Evangelical customers

All produce tailwinds leading to profitable growth. Buffett internalized his steadfast belief that the best businesses work smart, not hard. 

Investors in web3 should spend time focusing on businesses and projects that aren’t fighting uphill battles. With a wide range of opportunities, investors in digital assets and web3 projects should keep Buffett’s advice in mind and consider the weather when making choices to deploy capital.

Two present day examples come to mind:

HEADWINDS: Exchanges

As a micro-industry within the web3 space, cryptocurrency exchanges face three strong headwinds as we venture into 2023:

• Regulatory hurdles: Increasing government regulation and scrutiny of cryptocurrencies will make it challenging for investors to hold exchange assets due to longer-term uncertainty.

• Competition: The emergence of new and improved exchanges offering similar services make standard exchange offerings a commodity suggesting limited upside potential.

• Security concerns: With the proliferation of digital asset adoption and the power to “be their own bank,” investors will continue to move assets to other cold/warm storage to minimize risk loss of funds or lack of insurance coverage with standard exchanges.

Paired with the catastrophic fallout of exchange platforms like FTX and Celcius, investors looking for stable and predictable growth opportunities will likely fare better looking at other web3 sectors to deploy capital. 

TAILWINDS: Gaming

The proliferation of in-game monetization opportunities create exciting new channels of revenue for game developers and players alike. Recent projections estimate that the global Blockchain Gaming Market size will grow from $4.6 billion in 2022 to $65.7 billion by 2027; a compounded growth rate of more than 70%. 

• Asset Ownership: In 2021 alone, gamers spent over $60 billion of their hard earned money on in-game assets they don’t even own. Web3 gaming companies are poised to benefit from these buyers while providing mechanisms that allow players to own their in-game assets, making the gaming experience more engaging and interactive.

• Cross-game item interoperability: As more and more gaming projects are built on web3 platforms, increased interoperability will increase the value and utility of in-game assets. 

• Community building: Decentralized gaming platforms create opportunities for player communities to form and collaborate, leading to more social and immersive gaming experiences. In the long-run, projects in the gaming industry will benefit from increased network effects of growing evangelical communities.

The continued growth and impact of the video game industry appear poised to see continued upward trends for many years. More than ever before, people of all ages and demographics are playing video games for joy and competition, connecting with others, learning and much needed stress relief.

When evaluating opportunities for investment ask yourself the following questions:

• Is an impressive roadmap really going to lead to smooth sailing? 

• Is it raining competitors? 

• Will brewing regulation bring stormy seas?

Warner Bros. - The Perfect Storm

Enough with the metaphors - you get the idea. 

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