Mental Model #4 | Ideas Have No Value
Mental Model #4 | Ideas Have No Value
Beyond the Idea: Why Execution and Leadership Matter for Investment Success
Our series on mental models continues with Part #4. If you haven’t read the first three, here are the links:
Mental Models #1 - The need for a lattice of mental models, Charlie Munger
Mental Models #2 - Commercial democratization as a mental model
Mental Models #3 - Incrementally better isn’t enough, be fundamentally different
Mental Models #4 - this post
Mental Models #5 - coming soon
Mental Models #6 - coming soon
There are more to follow in the weeks ahead. Don’t miss them, sign up and we’ll send them directly into your inbox:
Ready to Invest in the Next Big Thing?
Have you ever read about a revolutionary new idea or seen a promising innovation on TV and thought, I need to invest in that!? We’ve all been there.
Napoleon Hill once said, “All achievements, all earned riches, have their beginning in an idea.” But this view can be misleading, suggesting that the idea itself is the ultimate prize. In reality, an idea alone isn’t valuable until it’s in the right hands.
Consider the case of Xerox PARC (Palo Alto Research Center), founded by Xerox Corporation in 1970. PARC invented many groundbreaking technologies, such as the graphical user interface (GUI), the computer mouse, Ethernet networking, laser printing, and the first personal computer, the Alto. However, Xerox failed to commercialize most of these innovations.
Xerox had the ideas but didn’t act on them, proving that even the best ideas are worthless without the right execution.
“Ideas without action are worthless.”
Harvey Mackay
Inspired by Xerox’s work, Steve Jobs incorporated the GUI into Apple’s LISA computer in the early 1980s. The concept wasn’t originally his, but he recognized its potential and had the business savvy to capitalize on it.
Jobs focused on selling hardware, making Apple’s GUI available only on Apple machines to boost computer sales. The strategy worked, and to this day, people choose Apple products partly for the distinct operating system that sets them apart from competitors.
However, Jobs’ decision to keep Apple’s GUI exclusive gave Bill Gates an opportunity. Recognizing the GUI's potential for a broader audience, Gates introduced Windows in 1985, designed for any personal computer, not just Apple’s. This inclusive approach propelled Microsoft’s operating system to dominate over 90% of the market by 1994.
In this story, three CEOs encountered the same idea but produced vastly different results.
The takeaway? It’s not about the idea, new technology, or target market - it’s about the people, especially the CEO. Without vision and passion, an idea has no value.
"Here's to the crazy ones, the rebels. The ones who see things differently. They have no respect for the status quo. You can glorify them or vilify them, you can't ignore them. People who are crazy enough to think they can change the world are the ones who do."
Steve Jobs
Ed Catmull sums it up in his book, ‘Creativity Inc’ when he says, 'Ideas come from people... So people are more important than ideas… Getting the team right is the necessary precursor to getting the ideas right… A good idea in the hands of a mediocre team is like giving a bottle of champagne to a child. They don’t appreciate it and don’t know what to do with it. But give a mediocre idea to a brilliant team, they’ll either fix it, or throw it away and come up with something better.’
The lesson? Don’t invest in the idea; invest in people who can turn that idea into something extraordinary.
Ideas That Might Surprise You
Consider these remarkable inventions and the minds behind them:
In 1832, Scottish inventor Robert Anderson built the first electric car.
English mathematician Charles Babbage designed the Difference Engine in the 1820s and later conceptualized the Analytical Engine, the world’s first mechanical computer.
Ada Lovelace, a pioneering English mathematician, is widely celebrated as the first computer programmer for her work on Babbage's Analytical Engine.
British mathematician Alan Turing, often regarded as the father of computer science, made monumental contributions to computing.
Sir Tim Berners-Lee, another British computer scientist, invented the World Wide Web.
Geoffrey Hinton, a British cognitive psychologist and computer scientist, is known as the "godfather of AI" for his pioneering work in deep learning.
Despite this legacy of groundbreaking ideas, the U.K. largely failed to capitalize on them, while the U.S. has emerged as a leader in each of these fields.
This pattern reinforces an important lesson: ideas alone are worthless. They need to be planted in fertile soil to grow into anything valuable, yet most of the time they materialize in entirely the wrong place.
Ideas Can Be A Value Trap
History is filled with transformative innovations like railways and air travel that sparked the imaginations of investors, offering promises of immense economic and social impact.
In the 19th century, the rapid expansion of railways seemed like a revolutionary investment opportunity with boundless potential. Similarly, in the early 20th century, commercial aviation held the promise of shrinking distances, enabling global travel, and delivering substantial financial returns.
While these innovations did reshape societies and economies, they rarely delivered the exceptional returns investors hoped for. Capital-intensive industries like railways and aviation face high upfront costs, long payback periods, and regulatory challenges, meaning technological breakthroughs don’t always align with profitability.
Take the railway boom as an example. In the 19th century, speculative fever drove both wealthy financiers and everyday citizens to invest heavily in railway companies, but many ventures ultimately went bankrupt, leaving investors with significant losses. While this wave of investment did build critical infrastructure, enabling faster transportation of goods and people, the primary benefits went to consumers, not the investors who took the financial risk.
Similarly, commercial aviation attracted early investor enthusiasm with its promise of connecting distant cities within hours. However, high operating costs, costly aircraft, and strict regulations quickly made aviation an industry with razor-thin margins. With few barriers to entry, competition became fierce, and prices were driven down, turning air travel into a commodity service. As a result, many airlines struggled financially, with the industry consuming far more capital than it created.
These cases reveal a common theme: groundbreaking technologies often reshape our world but rarely yield quick profits. The capital demands, regulatory hurdles, and maintenance costs make early investments speculative and frequently lead to poor returns.
Another telling example is the memory chip industry. From the 1970s through the 2000s, memory chip demand grew at rates of up to 70% per year, yet the industry struggled to be profitable. Don Valentine, the founder of Sequoia Capital, observed that while memory chips were crucial to the computing revolution, and despite requiring tremendous engineering expertise to produce them, they had become commoditized products with manufacturers forced to compete on price. This meant that most of the economic value created by these innovations flowed to consumers, while those invested in the memory business ended up capturing relatively little of the societal value being created. More particularly, manufacturers often had to burn through capital simply to keep up with the competition as technology was evolving so rapidly.
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company.”
Warren Buffett
While revolutionary technologies originate from brilliant minds and can profoundly impact our lives, they often present significant challenges for investors and are usually best approached with caution.
Conclusion
The next time you encounter an exciting new idea or hear about something poised to transform our world, remember this mental model. It is unwise to chase the promise of great riches without properly evaluating the opportunity in terms of the quality of the people involved and their ability to extract real value from whatever goods or services they hope to deliver.
