In business, there is a concept called Network Effect (also known as Metcalfe’s Law). The best way to explain it is by example. If you have a telephone and you’re the only person in the world with one, it’s useless. The network is nonexistent, and you have no one to call. If your best friend gets a phone, your phone becomes useful for the sole purpose of talking to that one friend.
Now, suppose all your friends got phones. Suddenly, your phone has become a valuable tool for communicating with all of your buddies. As more people get phones, your phone becomes more useful. Network Effect applies to more than just telephone systems. It applies to social media, distribution networks, library systems, and almost any network. The Network Effect means the more people use the network, the more useful the network becomes. On the flip side, the bigger the network becomes, the harder it is for people to leave it to join a different network.
What does all this have to do with investing and profiting? Companies that rely on networks get more powerful as they get bigger. It also becomes harder for existing customers to switch to competing networks. As long as their customer base continues to grow, their profits will continue to grow. With rising profits usually come increasing stock prices.
Network Effects are more potent in internet companies. Are you looking for some unshakeable stocks to form the foundation of a long-term investment strategy? I would go with Amazon (AMZN), Google (GOOG), Apple (AAPL), and Facebook (FB).
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