Finding 'Flow' Businesses
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Lao Tzu said, “Life is a series of natural and spontaneous changes. Don't resist them -- that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like.”
If I were a long term investor, I’d listen to Lao Tzu. And I’d put my money on “flow” businesses.
What’s flow? you may be wondering. Think about all the circulatory systems around you:
- Rivers, tributaries, and streams;
- Hearts, arteries and capillaries;
- Tree trunks, limbs, and branches.
Everywhere you look in nature, you’ll see flow systems. And they all have something in common: getting stuff -- oxygen, water or carbon dioxide -- where it needs to go. They also display similar patterns. For lack of a better term, they’re "vascular."
Economies are circulatory systems too. And any basket of businesses that gets stuff where it needs to go will likely have both staying power and profitability.
Think about some of the largest, most profitable companies on earth. These are the companies that, in some sense, help facilitate the flow of something:
- Energy -- ExxonMobil (NYSE: XOM) became one of the world's largest companies because it powers the vehicles that get carrots to your store shelves and your kids to school.
- Information -- Google (NASDAQ: GOOG) connects people with terabytes of data -- helping you find your high school sweetheart or your customers connect with you. And Vodafone (NASDAQ: VOD) is a king of mobile telephony, making it one of the most revenue-generating companies in the world.
- Retail Goods -- Wal-Mart (NYSE: WMT) is known for its fantastic logistics network -- one so powerful and extensive the retailer was able to get supplies to hurricane Katrina victims while the government was caught flat footed.
- Automobility -- Toyota, Volkswagen and Ford build the cars and trucks we drive from A to B.
- Capital -- HSBC (NYSE: HSBC.PB) and Wells Fargo (NYSE: WFC) get people and businesses the capital they need to be successful.
These mega-companies are like beating hearts. And they connect up with other consumers and companies in the wider ecosystem.
Investors who put together a “flow portfolio” could do worse than picking stocks on the basis of the flow dimension alone. The trick, if you’re looking for even higher returns, would be to find those flow upstarts -- companies that both facilitate flow and introduce disruptive or revolutionary elements that will allow them to compete effectively with bigger incumbents in that space.
Adrian Bejan dreamed up the idea of a flow system (the constructal law) while on a transatlantic flight back from a conference in France. The Duke University engineering professor thinks flow is, quite literally, where the action is -- in both the natural and social worlds. Bejan says it’s no accident that logistics networks look like circulatory systems in the human body or that information networks look a lot like river systems.
In their book Design in Nature Bejan and Peder Zane write:
For a finite-size (flow) system to persist in time (to live), its configuration must evolve such that it provides easier access to the imposed currents that flow through it.
That’s a fancy way of saying systems that allow things to flow better will survive over the long term. And that’s not just an opinion, claims Bejan. He says it’s a law of nature. To fight it is like trying to fight gravity. Might as well channel it.
What makes a good flow system? Freedom, says Bejan. "With freedom, a natural flow system evolves with progressively greater flow performance. Freedom is the sine qua non condition for improvements over time. Freedom is good for design."
The extent to which an entrepreneur can make and move valued products, services or information is the extent to which he’ll be rewarded. In energy and transportation, think of old J.P. Morgan and Henry Ford. In the information space? Before Steve Jobs and Bob Metcalfe there were Gutenberg, Morse, and Bell.
What if we started looking for those companies that act as economic flow systems? We might just see some nice returns.
Max Borders is author of the forthcoming book Superwealth: Why we should stop worrying about the gap between rich and poor.
MaxBorders has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Google, Vodafone Group Plc (ADR), and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.