As described in the book, Blue Ocean Strategy, by W. Chan Kim and Renée Mauborgne, companies that sell business cards or color printers operate in a red ocean space. Their industries are crowded, their fields are competitive, cut throat even, and their margins are razor thin. Their customers narrow buying decisions down to a few brands, which do essentially the same thing, and then make a decision based almost solely on cost.
When Apple unveiled the iPod in 2001, no other company in the world could enable people to carry thousands of songs in their pockets.
Apple was operating in a blue ocean.
Blue Ocean Investing
The guiding principle of a “blue ocean” type of investing is to build wealth in a space that is wide open. The financial firms that operate in blue oceans are the Apples of the investing world. They are some of the only ones doing what they do, and have separated themselves so totally from their contemporaries that they have little competition.
They can price themselves however they like. Unlike companies that sell business cards, they don't earn clients by slashing their price to undercut their competition. Like Apple, blue ocean type financial firms earn customers by adding value to clients' lives.
The big question is: do you know of them and why they are different?
Red Ocean Investing
Buy-and-hold financial advisors operate in the ultimate red ocean. Most money managers work in this space, applying buy-and-hold strategies to their clients' money. Like the business card industry of the financial world, these money managers attract clients by slicing tiny percentages off their fees to undercut their competition—or claiming big differences in strategy that provide small amounts of relative value in a given year’s returns, but they often don't add real value or provide a unique service.
The battle is then for relationships based solely on trust, where the people who are the best at developing relationships – not necessarily the most skilled money managers - typically get the most money.
What if strategy trumps trust? Ultimately, it does.
Red ocean, buy-and-hold managers are consumed by two things:
- Asset allocation: Portioning money across different asset classes, such as stocks, bonds, cash, real estate, commodities and alternative investments.
- Diversification: Buying different types and sizes of investments in each category.
Buy-and-hold managers seek to mitigate risk by spreading money around diverse portfolios and waiting out market downturns. They typically don’t add value by making adjustments according to signals, changing market conditions, and avoiding parts of crashes.
The industry consists of about $18 trillion. Let’s say it’s split evenly between asset allocation and diversification. Divided evenly, $9 trillion would go to each category—this is the red ocean strategy.
Some of the savviest money managers—blue ocean managers—operate in a different category: the tactical area of investment management. They use many different tools to alert them to industry and market trends to take advantage of untapped earning opportunities in individual companies, stocks, bonds, markets and mergers. If the current investment “pie” is split three ways instead of two, that leaves: $6 trillion to diversification, $6 trillion to asset allocation and $6 trillion to tactical investments. Tactical investments—buy-and-sell strategies such as Truncating the Tail—are a wide open, $6 trillion space where very few people are operating.
Wouldn’t it be interesting if it is in this Blue Ocean that investors stood to make the most money through partnerships with the managers who act as the Apples of blue ocean investing?
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