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We all have different ways of learning; some of us prefer text, some instruction, and others visually. I naturally prefer reading text at the start of learning a new topic or concept, prefer instruction when i’m trying to put that thing to action, and default to visuals when trying to understand something after getting stuck.

Claude is great for learning visually now that it can create interactive artifacts and has been helping me better understand some of the recent topics i’ve been writing about, such, as how to understand financial statements and Viable Systems Models (VSM), and i want to give you the prompt i’ve been using today. But first, lets see it in action by asking Claude to help me understand VSM, the Rumsfeld Matrix and produce an interactive compound growth calculator.

I then moved on to ask Claude to explain the Rumsfeld Matrix:

The ‘UNKNOWN’ category at the bottom was misplaced, but this time Claude produced a clickable quadrant where you could further explore one of the categories by clicking on it. I clicked ‘unknown unknown.’

Claude then produced another static visual. Again, there was a small error as Blockbuster went bankrupt in 2010 not 2009, but you can just let Claude know and it will fix it.

And finally i asked Claude to produce a compound growth calculator. I purposely left out the word ‘interactive’ to see if it produced a static image like above, but it produced an interactive version which is what was needed for this instruction. Here’s one screen grab:

And another after messing with the four interactive bars:

I hope this helps those of you who prefer learning visually or are looking for a prompt to help you create on brand interactive visuals.

Until next time, Karl.

Download the prompt by clicking the link. It will force you to download the document, so don’t worry, that’s normal.

Visual Explainer Prompt

The School of Knowledge was born as a placeholder for my thoughts and has turned into me distilling lessons i’ve learnt from being a nobody to a Royal Marine, to travelling the world, to getting paid thousands of dollars a day to cleaning ovens for minimum wage. I’ve built many lives in my 36 years and they’ve all taught me lessons—lessons that as a business owner-operator i want to share with people who are trying to build a life or career they want. If you just want the mental models, concepts and frameworks then stay for those alone. If you just want to learn about how to run or start your company and gain financial understanding you can do that too. But for those who want access to it all—warts and all—there’s an offer below waiting for you to just accept it.

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Yesterday i published the third deep-dive on the How to understand financial statements: Why cash is king. Essential reading for business owner operators:

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This is part three of my How to Understand Financial Statements series. A series for business owners and investors to finally get their heads around the three financial statements to improve their financial intelligence. Part one taught you How to Read an Income Statement and part two revealed Why Warren Buffett Reads the Balance Sheet Before Anything Else. Today’s piece is the third leg of the tripod: How to Read a Cash Flow Statement.

For decades Wall Street adored the income statement with measures such as EBITDA (famed by the cable cowboy John Malone) their preferred metric for determining how well a company was doing. EBITDA going up was good. EBITDA going down was bad.

But, if you’ve been following this series you should know by now that profit isn’t cash. You can’t pay for new equipment with profit, can’t pay your staff with profit—and you can’t pay your liabilities with profit either. You can only pay for things with cash.

If the income statement is a company’s report card, and the balance sheet is its photograph, then the cash flow statement is its bank statement.

It tells you one thing: where did the money actually go?

Why profit and cash are not the same thing

This is the part that trips most people up, so let’s deal with it first.

Two obvious reasons are that cash may be coming in by other means such as loans or from external investment. These won’t show up on the income statement, but will show up on the cash flow statement. But, there are also three not so obvious reasons for those who don’t yet fully understand the three financial statements:

• Revenue is booked at sale. When a company makes a sale or delivers a service, it records that sale as revenue. For example, my construction company takes on a months long timber window repair scheme for £15,000. We finish the job and invoice at the end of the month, but the customer (in construction) has 30 days to pay. No money will go into my bank account until that 30 days, but we record the project cost of £15,000 under revenue on our income statement. The profit is real; the cash is not yet there.

• Expenses are matched to revenue. The income statements main function is to tally up all costs and expenses associated with generating revenue during a given time period. Some expenses will have been prepaid already (a deposit on office rental), but most will be paid later. In my construction example, i have to pay merchants for materials, typically on account, and the subcontractors who carried out the work. If we’re doing our job right, both will typically be paid by us after we’ve been paid by the client.

• Capital expenditures don’t count against profit. I spend £60,000 on a new Ford Ranger, but that 60k doesn’t show up on the income statement as 60k. Remember...it shows up as depreciation. My accountant uses a straight-line method to depreciate the truck over three years. That’s £20,000 a year, or £1,666.66 a month of depreciation for 36 months—but the day i bought the truck i parted ways with £60,000 from my bank account.

In an ideal world cash should track net profit pretty closely, but for start-ups, or those businesses that are struggling—the discrepancy between profit and cash can be fatal.

Let’s continue to use Visa‘s financial statements as our walkthrough example for completeness.

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As a business co-owner I’m constantly spinning five plates at any one time. I want to focus more on the future of my business—capital allocation and identity—but i’m distracted by the now and day-to-day running of my business.

As an operator this is to be expected. After all, it’s unrealistic for 99% of people to expect for themselves the typical day that Warren Buffett has famed: read for 5-6 hours a day and make capital allocation decisions. The key distinction though; Berkshires businesses are run by their owner-operators, whereas for the rest of us—we’re left to run them and make capital allocation decisions.

That’s why for most of us the dream of reading 5-6 hours a day is just that—a dream.

A big part of how companies survive—and continue to thrive is because they deliver on what they’ve promised. But, the other side to that coin is financial intelligence. Once again owner-operators can look to investing concepts to better understand how their own business is running. The two are symbiotic. If you don’t understand why revenue isn’t cash, or know that your company gets paid on average 45 days when it should be 30, you’ll find yourself in hot water quicker than you can say ”how the hell has this happened?”

Because time is typically tight it deserves an appropriate solution. Once again we can draw from a legendary investor: Charlie Munger. Munger once told a story about the importance of using checklists to combat our built in biases and used a pilot as his example. To paraphrase, Munger said a pilot, regardless of how many flights they’ve flown will use the same checklist before each flight; and that if an intelligent professional like a pilot still uses a checklist, then there isn’t any good reason at all why you shouldn’t be using one as well.

With that in mind, I’ve produced a pdf with 45 financial metrics and examples I believe owner-operators must know to better understand their business.

45 Financial Metrics For Owner Operators

10.8KB ∙ PDF file

Download

Download

I’ve also put these metrics in a .csv for those of us who use flashcard software such as Anki to learn.

45 Financial Metrics For Owner-Operators (Flashcards)

Until next time, Karl.

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This is the second instalment of my How to Design the Systems That Run Your Business series. A series dedicated to helping business owners and operators run their businesses more efficiently, including how I run mine. To read the first article on designing and monitoring feedback loops please click here.

Every system has a boundary, and the first act of the system builder is to draw it. This sounds like an analytical exercise—study the problem, identify the relevant variables, include them—but it’s not. Boundary decisions are strategic choices, often the most consequential ones an organisation makes, because they determine what you can control, what you can accumulate, and what you must take as given.

Draw the boundary too narrowly, and you will be blindsided by forces you assumed were someone else’s problem. Draw it too broadly, and you will drown in coordination costs. The history of corporate strategy is littered with examples of both errors, and the theoretical and practical tools for thinking about boundaries—from Coase and Williamson to Ashby—remain among the most powerful and underused frameworks in organisational design.

Why firms exist: Coase, Williamson, and the logic of boundaries

Negotiating terms, writing contracts, monitoring performance, and finding the right counterparty all have a price attached to them—directly or indirectly. Ronald Coase’s 1937 paper “The Nature of the Firm” asked a deceptively simple question to his economic counterparts: if markets are efficient, why do firms exist at all? His answer was transaction costs. Using the market isn’t free. When costs are high enough, it makes sense to bring them in-house, where management can direct their resources through authority rather than by price. Hence the need for companies.

This presents a boundary question: how big should a company be? When the cost of organising one more transaction internally equals or exceeds going to the market, then going to the market is the most efficient thing to do. The company has expanded past its boundary and it is no longer cost-efficient to keep it internal.

The implications are significant:

• Firms are not just production functions—they are governance structures that exist because markets are imperfect

• The boundary of the firm is an economic decision, not an organisational one

• Vertical integration, outsourcing, and make-vs-buy decisions all flow from this logic

The business operator should constantly be asking: where is my boundary? and what makes sense to keep in-house versus outsource? This applies not only to finances, but to all resources: time, energy, and capabilities. At the micro level, the operator should be checking that what sits within their boundary is making them more resourceful—not less.

There are no hard and fast rules when it comes to boundaries. They contract and expand as markets change, meaning you must adapt to them as well.

Oliver Williamson, joint 2009 Nobel Prize winner in Economics, operationalised Coase’s insight through the concept of asset specificity—the degree to which an investment loses value when redeployed to a different use or relationship. Williamson identified four types: site specificity (an oil refinery cannot be moved), physical asset specificity (specialised tooling designed for a single product), human asset specificity (knowledge and skills tied to a particular relationship), and dedicated asset specificity (general-purpose investments made for a specific buyer that would create excess capacity if the contract ended).

When asset specificity is low, market transactions work well. Buyers and sellers are interchangeable, contracts are straightforward, and competition disciplines behaviour. When asset specificity is high, bilateral dependencies emerge. A factory line built to a single customer’s requirements, a skilled worker trained in proprietary systems, or a contractor who has built up years of accumulated client knowledge cannot easily walk away. This creates hold-up risk: the other party can renegotiate better terms after you’ve committed, knowing you can’t easily leave. You have that sunk cost feeling.

Williamson states that when asset specificity is high, transactions should be internalised, where managerial authority replaces contractual negotiation. The company’s boundary, then, is a governance decision: it sits where the risk of opportunism in the market exceeds the cost of bureaucratic coordination within the hierarchy.

Boundary decisions done well

Apple’s approach to integration is a masterclass in selective boundary-drawing.

Apple designs its own silicon, operating systems, and retail experience, but outsources final assembly to Foxconn and chip manufacturing to TSMC. Why don’t they just do everything? The reason they don’t is a masterclass in selective boundary-drawing: Apple integrates where tight coupling between hardware and software creates differentiation that cannot be achieved through arms-length contracts, and outsources where the bottleneck is commodity-scale manufacturing.

Apple’s decision to design its own processors is the Transaction Cost Economies framework in action. In 2008, Apple acquired PA Semi, a small processor design house, for $278 million. In 2010, Apple launched the iPad with the Apple-designed A4 chip—the first Apple system-on-chip. By 2020, Apple had introduced the M1 chip, which ended their reliance on Intel for Mac processors. Steve Jobs captured the strategic logic by quoting Alan Kay: “People who are really serious about software should make their own hardware.” It’s not that Apple could make better chips than Qualcomm or Intel in some abstract sense—but that a chip designed for a single entity can optimise for things a general-purpose chip cannot: power consumption, security architecture, and hardware-software co-design.

Amazon’s boundary was drawn not from selective integration—but sequential expansion.

In his 2023 shareholder letter, Andy Jassy described building something called “primitives“—core capabilities like warehousing, picking, packing, and shipping that can be turned into new products. Internal logistic primitives turned into Amazon Prime, an online store selling books turned into an everything store, and internal infrastructure needs turned into AWS. This boundary strategy wasn’t selective, but sequential. Each internal need was externalised into a product that fed into the Amazon flywheel.

The pattern at Amazon is consistent: solve an internal problem, build the infrastructure, then externalise it as a platform—expanding the firm’s boundary and feeding the flywheel simultaneously.

It’s easy to look for companies that have demonstrated a masterclass in not only designing their boundaries but executing them. Let’s now look at two that got it terribly wrong.

Boundary decisions gone wrong

Boeing’s “efficiency” boundary design ends up being a plane crash.

The Boeing 787 Dreamliner programme is an example of catastrophic boundary failure. Boeing outsourced up to 70% of the aircraft’s design, engineering, and manufacturing to more than fifty tier-one suppliers across the globe. The budget ran to an estimated $40 billion, dwarfing their original estimate of $5 billion. As well as being 40 months late, Boeing’s final assembly line was held together with temporary bolts purchased from Home Depot after supplier Alcoa could not ramp up fastener production fast enough.

How could a company like Boeing—known for engineering excellence—get it so wrong? UCLA Anderson Professor Christopher Tang had an answer:

“You only know what’s going on with your tier 1 supplier. You have no visibility, no coordination, no real understanding of how all the pieces fit together.”

I would say it’s pretty critical that you have a deep understanding of how the parts of an aircraft should fit together.

Boeing’s mistake was expecting to receive complete, flight-ready assemblies, but instead receiving sub-assemblies requiring extensive rework. They had fallen into a classic systems trap: information delay. They had modelled their system on Toyota’s supplier-development approach, but failed to build the relational infrastructure that makes Toyota’s system work. Toyota shares information, conducts joint improvement activities, and treats key suppliers as extensions of itself—relationships built over decades of investment in human asset specificity. Boeing handed off complete design control to suppliers based on price, not relationships. These are exactly the high-specificity transactions that Williamson predicted would fail under market governance. In his Nobel lecture, Williamson used the outsourcing of Boeing’s highly specialised fuselage to Vought Aircraft Industries as a perfect example of something requiring significant investment in specific assets that should have been kept in-house.

Boeing’s 787 Dreamliner is a case study in misaligned organisational boundaries—a prime example of how prioritising cost structure over quality control can massively backfire.

How Kodak had the future of photography in its hands and let it slip.

In 1975, a twenty-four-year-old Kodak engineer named Steven Sasson built the world’s first portable digital camera—a 3.6-kilogram device capturing 100×100 pixel black-and-white images onto a cassette tape. Management’s reaction, as Sasson later told the New York Times, was: “That’s cute — but don’t tell anyone about it.” It’s not that Kodak was ignorant of the new technology; they filed a patent in 1977 and earned billions of dollars in licensing revenue from it. The problem was the fence line Kodak had drawn around the company—their boundary. Kodak’s business was film, paper, chemicals, and processing. Digital photography didn’t fit their model or their identity. They treated it as exogenous—something to be curious about, rather than an endogenous capability to be developed from within.

When Kodak’s leadership did diversify, they moved into adjacent markets by acquiring Sterling Drug for $5.1 billion in 1988. Their logic seemed sound: “we know chemistry, drugs involve chemistry, therefore this is adjacent.”

The problem wasn’t their logic—it was that they weren’t following where their customers were going: digital. The Sterling Drug investment was sold off in pieces by 1994, and in 2012 Kodak filed for bankruptcy, thirty-seven years after one of their own engineers had built the future.

Kodak restricted the expansion of their boundary by actively deciding not to meaningfully pursue digital photography. This illustrates how inside-view thinking (we’re good at chemistry) can crowd out outside-view thinking (the market is moving somewhere we aren’t).

These four examples—two good, two bad—lead us into the theoretical framework that explains why Apple and Amazon succeeded, and why Boeing and Kodak didn’t. Variety.

Ashby’s Law and the question of variety

W. Ross Ashby’s Law of Requisite Variety, published in An Introduction to Cybernetics in 1956, provides the theoretical foundation for understanding why boundary decisions matter so much. The law states, in Ashby’s own words, that “only variety can destroy variety”—meaning that for a system to remain stable, its control mechanism must be capable of generating at least as many states as the disturbances it faces. A thermostat with only on/off settings cannot regulate temperature precisely; a manager with a single response to every problem cannot govern a complex organisation.

The implications for boundary-setting are direct. If you draw your system boundary too narrowly, your system will lack the requisite variety to handle disturbances from the environment. If you draw it too broadly, you waste resources managing internal complexity that does not contribute to matching external variety.

Organisations must be able to adapt to variety. Kodak’s boundary was drawn too narrowly by not assigning resources to digital—which was not only a clear market trend but a signpost from the future that chemical would be obsoleted by digital. The conglomerate’s boundary is often drawn too broadly, its variety impinged by size and coordination costs that offer little flexibility.

So, for you—the business operator or systems designer—how do you move from understanding Ashby’s Law to putting it into practice?

Stafford Beer’s Viable System Model (VSM) is essentially Ashby’s Law operationalised into an organisational architecture. Ashby says a viable system must match the variety of its environment. Beer asked a follow-up question: how do you actually design an organisation to do that?

The Viable Systems Model Framework

The Viable System Model (VSM) answers this by splitting the variety-handling problem across five subsystems:

• System 1: the operational units absorbing frontline variety

• System 2: the coordination needed between units to prevent confliction

• System 3: internal control and resource allocation (the “inside and now”)

• System 4: external intelligence gathering (the “outside and future”)

• System 5: identity and policy, which sets the purpose and balance of the organisation

Through this framework, Beer recognises that you can’t centralise all variety-handling at the top. The environment moves too fast and is too complex, with informational delays inevitably distorting what’s happening in real time. A viable system should absorb local variety. System 1 units handle the complexity of what’s happening on the ground. System 4 is focused on information gathering—not just to plan for the future, but to protect it. Each system offers a buffer.

Learning about the VSM, you begin to see why Warren Buffett and Charlie Munger preferred to run Berkshire Hathaway the way they did. Their decentralised model continued to allow exceptional management to run and absorb the complexity of day-to-day operations—something both Warren and Charlie would gleefully admit was outside their Circle of Competence. Warren and Charlie’s role was clearly Systems 4 and 5: looking for external opportunities by reading the market and focusing on increasing shareholder value.

If you've found value in this essay so far, what follows is where the theory meets the ground. I walk through how I've applied Beer's five systems to my own construction business and the tools I've invested in, what they cost, what they saved, and the questions I'd now ask of any business before drawing its boundary. If that's useful to you, consider upgrading to TSOK+.

How I used the VSM framework to build my business’s systems

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The School of Knowledge is the weekly newsletter for SME owners and investors who want frameworks they can actually use — frameworks, checklists, and operating manuals every weekend, built to read on Sunday and use on Monday.

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18 months ago, my co-business owners and I turned down the opportunity to refurbish a beautiful four-storey Georgian building in Manchester city centre. Not because we couldn’t do the work — we’d already completed a smaller, similar scheme two years before. Not because the margin was wrong — it would have been our largest ever contract. We turned it down because the client had a particular kind of energy. The sort that tells you the relationship will cost you, and your reputation.

All it took was eight words in a pre-start meeting: “I don’t want to hear about price increases.”

Thinking about making decisions is additive. Frameworks for evaluating options, scoring criteria, weighing upside. The whole apparatus of good decision-making, as it’s usually taught, is about getting better at choosing what you want.

The more durable skill is the opposite. It’s subtraction. Building a clear picture of what you won’t do — and trusting your gut when the moment arrives.

This isn’t exactly a new idea. It shows up across disciplines under different names.

The Stoics called it via negativa — the idea that you understand something more reliably by what it isn’t than by what it is. Taleb borrowed it for investing: remove the fragile, and what survives tends to be worth keeping. Munger called it inversion — “tell me where I’m going to die, so I’ll never go there.” Buffett built the too hard pile as a literal mechanism: a category of decisions not refused individually but pre-refused as a class. The pile doesn’t require fresh analysis every time. The work was done once.

What these frameworks share is the same underlying logic: subtraction as decision technology. You’re not picking from a menu. You’re shrinking the menu until only the obvious things remain.

Most operators have a wish list for the work they want. Very few have an exclusion list. The ones who do tend to move faster — not because they’re smarter in the moment, but because the moment requires less of them.

The exclusion list does the cognitive work in advance. This client profile was just a hard no. It wasn’t that we tried to squeeze more money from clients — it was that he’d already delayed the job by two years (construction materials and labour invariably go up at least once a year), hadn’t paid a penny to the design team who’d designed his project, and very much thought of himself as some sort of private equity geezer. He even turned up to a meeting with a Great Dane in tow. I can only assume he was trying to intimidate us. His problem was he thought that bringing a dog to a meeting with prospective contractors would do that.

Examples like this also sharpen your circle of competence — not as an abstract boundary, but as a working document. Knowing what you won’t touch tells you more about what you actually are than any mission statement.

The hard part isn’t making the list. It’s trusting it when something sits just inside the line and the upside looks attractive. That’s when the list earns its keep.

What’s on your exclusion list — and have you ever written it down?

Until next time, Karl.

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The second instalment of my How to Understand Financial Statements series explains how to master the balance sheet. Warren Buffetts first statement he picks up. The first instalment on understanding the income statement can be found by clicking here.

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The School of Knowledge is the weekly newsletter for SME owners and investors who want frameworks they can actually use — frameworks, checklists, and operating manuals every weekend, built to read on Sunday and use on Monday.

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Out of the three financial statements, the balance sheet is more than likely to be the most confusing to you. After all — profit derives from revenue, and cash is — well, cash. But the balance sheet is the first financial statement that Warren Buffett picks up. Why?

Simply put, the balance sheet is harder to manipulate than the income statement. For business operators and self-taught investors, it’s not that you should understand it — you absolutely need to.

This is part two of the How to Understand Financial Statements series. Part one, is free and taught you How to Read an Income Statement. Today, you’ll be learning why the balance sheet always reveals the most about a company.

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The School of Knowledge is the weekly newsletter for SME owners and investors who want frameworks they can actually use — frameworks, checklists, and operating manuals every weekend, built to read on Sunday and use on Monday.

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Not all problems are the same types of problem.

The biggest mistake you can make as an operator is to treat a complex situation as if it were merely a complicated one. Every problem lives somewhere — and where it lives determines how you should respond to it. The Cynefin Framework is a decision-making tool developed by David Snowden at IBM in the late 1990s. Its name comes from the Welsh word “habitat” or “place of belonging,” and there are five domains which help you categorise what type of problem you’re facing.

Domain 1: Clear

These are the problems where cause and effect are obvious to anyone paying attention. The rules are known, best practices exist, and you just need to follow them. The approach is: sense → categorise → respond.

For my construction business, this can be anything covered by a standard, code, or regulation. We have risk assessments and method statements to help mitigate and control risks and hazards. We follow building regulations set by the UK government or the HSE for safety and quality control. Fire door specifications or concrete mix ratios are pre-determined against rigorous testing. There’s no debate about the right answer — you just have to apply the known procedure. When dealing with novelty, if you reach for a solution that won’t fit, it simply won’t work.

The risk here for operators is complacency: you cannot treat all problems like they’re Clear problems.

Domain 2: Complicated

Cause and effect still exist, but you need expert analysis to identify them. The answer isn’t obvious, but it is knowable — given the right expertise. The approach is: sense → analyse → respond.

Just this week one of my site managers came across a complicated problem but didn’t know how to respond, because she determined she lacked the knowledge to answer it. She thought this was a Clear domain problem. The question came from a specialist subcontractor about the design of their bolts for anchoring down the steel to the new foundation. It isn’t a question we’re qualified to answer — hence structural engineers being part of the design team. The only solution was to tell her to remove the stress of having to deal with this and get confirmation from the expert — which in this case was the structural engineer.

Complicated domains need experts. The data and logic are there — but somebody who knows how to sieve through it and correctly analyse it is needed. It’s the territory of experts and professionals, where there could be more than one good answer — but both come from rigorous analysis.

Domain 3: Complex

Here’s where most interesting business and investment decisions actually live, and where most leaders get into trouble. In Complex systems, cause and effect can only be understood in retrospect. You can’t analyse your way to the answer in advance because the system itself changes in response to what you do. The approach shifts: probe → sense → respond.

Capital cycles aren’t predictable by modelling. I can observe signals of where I believe the UK construction industry is within that cycle, but I can never be 100% sure we’re at the bottom or the top. I can only plan for such eventualities and remain adaptive. The danger in Complex terrain is demanding certainty before acting — or, equally bad, using one successful probe as evidence of a repeatable formula. The system keeps moving. Treating the current shortage of raw materials because of the Iran/Israel/America conflict as a Clear or Complicated domain problem means I am either trying to analyse a moving target and will act too slowly, or treating the issue as having a standardised process and making erroneous decisions.

Domain 4: Chaotic

Cause and effect have no relationship at all — there’s no time to analyse. You need to act immediately to establish some kind of order, then move into sense-making. The approach is: act → sense → respond.

Here, you act to contain, stabilise, and prevent further harm or problems. My Royal Marines background is instructive here: the ability to act under pressure without complete information, establish some order, and then begin to understand what happened. Operators who freeze because they want more data in Chaotic situations make things worse. What’s the absolute worst thing that could happen within your business — a complete shit show where the consequences are extreme? That’s this domain.

Domain 5: Disorder

This is the most dangerous domain, and the least discussed. It’s not a type of problem — it’s the state of not knowing which domain you’re in. When people are in Disorder, they default to their comfort zone. The expert reaches for analysis. The instinct-driven operator acts before sensing. The process-follower looks for a procedure. Most bad decisions happen here — not because people are stupid, but from misdiagnosis.

The Central Lesson

The framework’s real value comes from having a clear understanding of the boundaries. Clear problems can become Chaotic if you become complacent. Seeking certainty before action confuses Complex problems with Complicated. And the instinct to treat everything as Complicated — to keep hiring more consultants, to run more analysis — is a particular trap for intelligent, analytical people.

The diagnostic question worth keeping in your back pocket: “Am I analysing this, or am I experimenting with it?” If you need to experiment to find out, you’re in Complex terrain — and your job is to design good probes, not better analysis.

If you found this useful, the paid tier of The School of Knowledge+ goes deeper into the frameworks that actually change how you operate and invest. Recent issues have covered Hamilton Helmer's 7 Powers — the competitive strategy framework used by some of the world's best investors — with worked examples, diagnostics, and case studies you won't find summarised anywhere else. If you want to think more clearly about business and capital, it's worth the upgrade.

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Incase you missed it

This week i’ve been digging back into systems thinking; mainly understanding how to diagnose and alter feedback loops. Essential reading for those wanting to understand the drivers behind their business behaviours.

Until next time, Karl.

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In the big picture, one store’s inventory problem may seem trivial and fixable. But imagine that the inventory is that of all the unsold automobiles in America. Orders for more or fewer cars affect production not only at assembly plants and parts factories, but also at steel mills, rubber and glass plants, textile producers, and energy producers. Everywhere in this system are perception delays, production delays, delivery delays, and construction delays. Now consider the link between car production and jobs—increased production increases the number of jobs allowing more people to buy cars. That’s a reinforcing loop, which also works in the opposite direction: less production, fewer jobs, fewer car sales, less production. Put in another reinforcing loop, as speculators buy and sell shares in the auto and auto-supply companies based on their recent performance, so that an upsurge in production produces an upsurge in stock price, and vice versa. That very large system, with interconnected industries responding to each other through delays, entraining each other in their oscillations, and being amplified by multipliers and speculators, is the primary cause of business cycles.

The difference between a systems thinker and a system builder lies in a single verb: design. To read Meadows is to learn how to see feedback loops in existing systems—to trace reinforcing spirals and identify balancing mechanisms. But the operator’s question is harder: how do you engineer feedback into a system that does not yet have it? How do you decide what signal to amplify, what delay to shorten, what correction to automate? The shift from observation to architecture is the shift from analysis to craft, and it is the foundational skill of anyone who builds organisations, products, or supply chains.

A well-designed feedback loop compounds because every major decision is evaluated against the loop’s logic, not against isolated metrics.

Zara’s customers shop at their stores 250% more than other fashion retailers—not because their clothes are inherently better than everybody else’s—but because they understood how to design effective feedback loops.

The flagship brand of Inditex, Zara’s feedback loop was built on speed and efficiency. Traditional fashion retailers typically take six to nine months to go from design to shops, with most of production done pre-season. Zara has compressed this down to fifteen days. Under a quarter is designed before the season begins, with over half designed, manufactured, and shipped mid-season in direct response to customer demand. Store managers across more than six thousand shops in over eighty countries transmit sales data and qualitative observations—”this colour shirt isn’t selling,” “we can’t ever have enough stock of this winter coat”—to a centralised data-processing centre that operates around the clock. Small initial batches, sometimes just a few items, are sent out to test demand and feed data back into the system.

The logic behind the loop runs as follows: fast response to demand generates higher sell-through rates (roughly 85 per cent of items sell at full price, against an industry average of around 60 per cent), which generates better margins, which funds the proximity manufacturing infrastructure. There was also a deliberate choice to house roughly 50 per cent of production hubs in Spain, Portugal, Morocco and Turkey in lieu of Asia to make this kind of speed possible in the first place. The average Zara customer visits seventeen times per year, compared with three or four for a typical retailer, because the product mix changes constantly.

The feedback loop is not merely observed; it is architecturally embedded in every operational choice—from the location of factories, to the design of the RFID-tagged supply chain, to the twice-weekly ordering cadence.

But not every feedback loop requires speed to be effective—and not every successful feedback loop has to be reinforcing.

Between 1948 and 1975, Taiichi Ohno and Eiji Toyoda created Toyota’s Andon system—one of the most elegant balancing feedback loops ever designed for a production environment. When a worker on the assembly line spots a fault, defect, shortage, or safety hazard, they pull a cord (or press a button in modern versions). A coloured light displays above the assembly line—green for normal, yellow for help requested, and red for line stopped. The word “Andon” means “paper lantern” in Japanese, hence the colours. Once initiated, a team leader goes over to thank the worker who pulled the cord. If the problem can be fixed within the cycle time, the line continues; if not, the affected station is stopped until the problem is resolved. The frequency and nature of every stop is logged and fed into Toyota’s continuous improvement process, Kaizen.

Problems on a Western production line are thought of as poor performance, whereas at Toyota—they are seen as the highest form of quality control. At one Toyota plant, when the average number of Andon pulls per shift dropped from a thousand to seven hundred, the CEO called an all-hands meeting—not to celebrate but to investigate. Either problems were being hidden or standards were too low. For Toyota, the absence of correction is itself a danger signal because it implies the balancing feedback loop has gone quiet.

The NUMMI joint venture between Toyota and GM in the 1980s proved the system was transferable: the Fremont, California workforce, previously considered GM’s worst, became its best within a year of adopting the Andon system and its cultural infrastructure.

Toyota embedded in their production lines a system that rewarded patience over speed, quality over output metrics. They demonstrated another clear understanding of feedback design when they also created a negative feedback loop—with the purpose of mitigating material waste.

Toyota’s pull-based system ensures materials are only moved down the production line as and when they are needed, resulting in maximum efficiency. This is the inverse of a push-based system that forecasts when certain materials are expected to be needed.

At Toyota, Kanban cards are physical tokens of demand, visible to all. The card-based production control system operates as a balancing feedback loop: downstream workstations signal to upstream workstations when they need more material. This pull-based system creates a negative feedback loop that regulates production by actual consumption rather than by forecast, preventing the overproduction that bedevils push-based systems.

The Zara and Toyota cases are instructive, but they're the easy half of this essay. The harder question is what happens when feedback loops go wrong — and more usefully, what you actually do about it. Below i've covered three failure modes (with the case studies to match), the single highest-leverage intervention for each, and a practical audit framework you can apply to your own business. If you've ever explained a bad quarter with "the market shifted" or "we didn't see it coming," that section is probably worth your time. There's also a downloadable worksheet for paid subscribers.

When feedback loops fail: too slow, too fast, or miscalibrated

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The School of Knowledge is the weekly newsletter for SME owners and investors who want frameworks they can actually use — frameworks, checklists, and operating manuals every weekend, built to read on Sunday and use on Monday.

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What’s the difference between being stuck in a job you despise for 40 years and a 12 x 8ft cell? Nothing. The sad fact is—most people get up and go to work for somebody else’s version of what it means to live life. You feel paralysed, trapped in a body betraying your own free will. You don’t want to be here—you swore you weren’t going to be—but here you are anyway.

There’s something lifeless about following another person’s dreams. When you’re a kid, your dreams are of being a rockstar, an athlete, an artist. I was always the footballer scoring the winning goal in the World Cup final. Nobody wanted to be a cog in a massive wheel.

You say dreams are for kids, but i disagree. They just look different as an adult.

A dream as an adult is working on something you value—not despise. A dream is having enough money to share experiences with the people you love—not dislike. You waste 40 hours of your week, or more bluntly—86.6 days of your year on a job you couldn’t care less for. A dream as an adult is waking up in the morning and looking forward to the day—not in a whimsical way, but because you’re ready for whatever the day throws at you.

A dream as an adult is doing something with purpose.

I never once imagined as a kid, or even in early adulthood, that i would enjoy writing. Even worse—enjoy writing about stuff like capital allocation, mental models or how to be a systems thinker. But you can’t choose who or what you fall in love with. 15-year-old Karl would probably be taking the piss out of 36-year-old Karl. Perhaps because i’m approaching 40, i’ve been thinking about midlife crises a lot more. I don’t think i’m the susceptible type, but i also didn’t see my future love for financial ratios either. But, why do people have midlife crises? I think people have them for many reasons, but i think many come back to one thing: purpose. Or more specifically—a lack of.

Us humans are a stubborn bunch. We’d rather be an insider suffering with the many, than an outsider. To go against the grain is to choose isolation. Writing about business couldn’t sound any more boring if i tried; it also sounds counterintuitive to what i’ve spoken about, but let me explain: The shoes on your feet, the coffee in your cup, and the eggs you ate for breakfast all come from businesses. People are businesses—plain and simple. Without people there can’t be any businesses.

So let me ask you again: What’s the difference between being stuck in a job you despise for 40 years and a 12 x 8ft cell? Nothing. But, let me ask it differently: What’s the similarity between being stuck in a job you despise for 40 years and a 12 x 8ft cell? A lack of purpose. Direction.

The School of Knowledge was born as a placeholder for my thoughts and has turned into me distilling lessons i’ve learnt from being a nobody to a Royal Marine, to travelling the world, to getting paid thousands of dollars a day to cleaning ovens for minimum wage. I’ve built many lives in my 36 years and they’ve all taught me lessons—lessons that as a business owner-operator i want to share with people who are trying to build a life or career they want. If you just want the mental models, concepts and frameworks then stay for those alone. If you just want to learn about how to run or start your company and gain financial understanding you can do that too. But for those who want access to it all—warts and all—there’s an offer below waiting for you to just accept it.

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For those that want to keep on reading about uncertainty and changing your beliefs (or lack of) start here:

Incase you missed it

Yesterday i published the third deep-dive on the 7 Powers series: Counter-Positioning. Essential reading for business owner operators:

Until next time, Karl.

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The School of Knowledge is the weekly newsletter for SME owners and investors who want frameworks they can actually use — frameworks, checklists, and operating manuals every weekend, built to read on Sunday and use on Monday.

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There are few occurrences in business as complex as the emergence and eventual success of a new business model. — Hamilton Helmer

After the First World War, the French built a line of concrete fortifications, obstacles, and weaponry along their border to protect themselves against the Germans, famously known as the Maginot Line. Up until the Second World War, war was almost predictable, slow, and recently fought in filthy trenches just metres from your enemy. You couldn’t blame André Maginot’s rationale for building the line — after all, it was the Germans who had been defeated the last time out.

But the Germans — bankrupt, embarrassed, and sent to the world’s metaphorical naughty corner — developed something so extraordinarily novel it birthed its own name: Blitzkrieg. And it was something else. The Maginot Line never stood a chance as the Germans ravaged their way through Europe to Paris, unfortunately developing its own signature branding: “For expensive things that offer a false sense of security.”

However, this isn’t a lesson on military ignorance: it’s about the most consequential Power in Hamilton Helmer’s 7 Powers. A Power whereby the incumbent can know of the novel business model, but declines to alter their strategy until it’s too late and they’ve been steamrolled. This Power is called Counter-Positioning.

This is the third deep-dive in the 7 Powers series — Hamilton Helmer’s landmark book on how businesses use strategy and value to create consistent differential returns—something he calls Power. In the introductory article, I explained why value creation alone isn’t a moat; in the first deep-dive, I covered Scale Economies; in the second, we examined Network Economies. Let’s now get into the third Power: Counter-Positioning.

What is Counter-Positioning?

A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business. — Hamilton Helmer

Jack C. Bogle had a radical new idea: an equity fund that simply tracked the market. On May 1st, 1975, he managed to persuade a reluctant Wellington Management board to back his company, Vanguard. Up until then, funds had been run by managers who collected fees and commissions — but Bogle’s Vanguard would operate at cost, return all profits to fundholders, and eventually abolish sale commissions.

The idea didn’t go down well — initial subscriptions reached just $11 million by 1976. The sticking point was that Bogle needed brokers to help distribute the fund, but the fund’s premise was centred around not needing their input. It’s hard to get people to do things for you when they have no self-interest.

And just like the French were thinking rationally when they built the Maginot Line, it’s easy to see why the active management firm Fidelity weren’t interested in this new business model. No star fund managers, no research department, and an unwillingness to attempt to beat the market — it went against everything that made Fidelity what it was.

Fidelity were awake to the threat alright — they just fancied their model more than Vanguard’s. That’s what Counter-Positioning actually is: the incumbent knowingly decides against adopting the new business model. And it’s far more unsettling for investors than a story about incumbent blindness.

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The Mechanisms of Counter-Positioning

Compared to Vanguard, Fidelity Investments possessed a structural disadvantage: they had to consistently beat the market before deducting their fees to arrive at the same place Vanguard was aiming for — to track the index. That’s no small task, and Fidelity was fighting against three forms of collateral damage:

Revenue cannibalisation: Vanguard directly ate into Fidelity’s active management fees by offering customers a way to circumvent them entirely — opting for Vanguard’s fund instead. This is similar to how Blockbuster relied on late fees (50% of revenue) and Netflix came along with a superior model: digital rental and no late fees.

Distribution destruction: The new model undermined Fidelity’s reliance on brokers, who collected their fees regardless of how well the fund performed.

Identity destruction: The most powerful of the three. Fidelity’s whole mythology was built on the premise that people needed their expertise — their star managers, their research, their brokers. Admitting that Vanguard had a superior model wasn’t just breaking a historical promise to customers: it was questioning the very identity of the company. Some businesses just can’t look themselves in the mirror.

Benefits and Barriers

The benefit

The new business model is superior to the existing one by offering considerably lower costs, or the ability to charge higher prices. For Vanguard, they completely negated portfolio manager fees, broker fees, and trading costs simply by not needing their ‘expertise’. Along with returning profits to fund-holders, this allowed Vanguard to take market share from Fidelity.

The barrier

Compared to the other Powers, the barrier for Counter-Positioning is a tad more mysterious. The barrier is formed from the incumbent’s own willingness to deliberately not engage with the newer business model, believing the potential returns are inferior to their legacy model and won’t make up the collateral damage from switching. Their existing model acts as a prison. It wasn’t that Fidelity were caught on their toes, or lacked foresight — it was determined through a thoughtful, calculated process that ultimately concluded they just couldn’t switch financially. A rational decision by any means.

“Why would anyone settle for average returns?” — Ned Johnson, Fidelity

Case Study: Vanguard

So how did Bogle’s bold move in 1976 pan out? Let’s look at Vanguard’s assets under management (AUM):

• August 1976: $11M at launch

• Mid-1977: $17M (Helmer’s figure, from the book)

• End of 2015: $3T (Helmer’s figure, from the book)

• December 2025: $12 trillion total, of which $10.1 trillion is index assets and $1.9 trillion is active1

That progression — from $11 million to $12 trillion over nearly 50 years — is one of the most dramatic compounding stories in financial history. If we calculate the CAGR:

CAGR = (12,000,000 / 11)^(1/49) − 1 = approximately 32.8% per year

(Both figures expressed in $M: $12 trillion = $12,000,000M; starting AUM = $11M)

But it’s important to note a caveat: this isn’t an investment return. It’s a measure of business growth — AUM expansion driven by two compounding forces simultaneously: market appreciation on existing assets, and net new inflows as investors moved from active to passive. What the CAGR captures is the combined effect of a superior product attracting capital while the incumbent was rationally paralysed. Every year Fidelity decided not to fully replicate Vanguard’s model, more assets migrated. The CAGR isn’t measuring Vanguard’s investment skill — it’s measuring the rate at which the Counter-Position compounded against Fidelity.

Fidelity’s rational decision not to engage with the new model may have been smart in the short term, but catastrophic long term.

The fee cliff

It wasn’t until 2018 that Fidelity launched their Zero funds2, introducing a 0% expense ratio to compete with low-cost index providers. Just 42 years later.

Interestingly, average expense ratios increased through the 80s and 90s, rising to an average of 1.04% in 1996. The incumbent active funds weren’t even cutting fees in response — they were raising them. Eventually, passive investing became impossible to ignore, and by 2021 expense ratios had fallen to approximately 0.46% compared to 0.06% for index funds — a gap of roughly 7.5x.

Fidelity manages roughly $5.4 trillion in discretionary AUM today. At a blended active fee of even 0.50%, that’s $27 billion in annual fee revenue. Vanguard’s average expense ratio across its $12 trillion AUM is approximately 0.05–0.06%, producing around $6 billion in revenue despite managing more than twice the assets. That gap — $27B vs $6B on comparable AUM — is the collateral damage number made concrete. You could argue that Fidelity would have been foolish to move into passive indexing any sooner than they did.

That’s what makes Counter-Positioning as a Power so interesting. The incumbent can survive — thrive even — but they are rationally unwilling to copy the new entrant because the numbers don’t math the way they want them to math. Fidelity survived. Blockbuster did not.

The distribution network problem

Not only did the numbers not stack up, but Fidelity was built on incentives. Active fund managers were paid well for beating the market, advisors earned a commission for getting customers to move money into Fidelity’s funds, and brokers collected fees for sorting out the admin. It was a win-win-win for all involved. And besides, most people who invest in funds look at total fees of, say, 2–3% per year and think: that’s not a bad deal, is it? It’s only when you do the maths and see the compound effect of those fees over 30 years that you start to have a heart attack.

Better to do that maths in your healthier years, i’d say.

For Fidelity to have entered this market in the mid-seventies would have meant a complete reconstruction of their foundations, and from being in the construction industry i can tell you one thing: if you need to change your foundations, whatever’s sitting on top of them — a building, a business model — has to come down.

The identity trap

Most interesting, i think, is how it would have looked if Fidelity had changed course. A prestigious firm with ‘world-class’ portfolio managers suddenly tells customers: “we actually think we’ve found something better — and guess what, it’s practically free.” Maybe great for those just signing up, but a potential headache for those already heavily invested. Having a reputation to uphold is costly.

So, Fidelity saw exactly what Vanguard was doing. They had the capital, the distribution, the brand, and the talent to respond. They understood the new model completely. So why did it take them over forty years to copy them?

In the paid section, i look to answer this question, along with:

• The precise calculation Fidelity made — and why it was rational, not lazy

• Helmer’s decision tree for evaluating any Counter-Position — and what it reveals about durability

• The three ways incumbents fail to respond: Milk, History’s Slave, and Job Security — and why only one of them is investable

• How to calculate whether a Counter-Position will hold or collapse

• Six red flags to watch out for that tell you if Counter-Positioning will fail

• Where weak versions of this Power appear — and what they’re actually worth

Helmer’s Decision Tree: The Taxonomy of Incumbent Failure

Stand-alone attractive?

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Every capital allocation decision you make means foregoing other options available to you—and getting those decisions right is the difference between good investments and great ones.

Between a 12% return or 20%.

Great investors such as Charlie Munger and Nick Sleep thought about capital allocation a lot, and i leaned on their way of thinking when i had to make a capital allocation decision for my business this week.

The construction industry is cyclical. We’re usually one of the first industries impacted by recessions and usually the last out of one. The last couple of years i’ve seen clients delay more projects, material and labour prices double and national insurance rates shoot up, all contributing to a difficult period for the industry.

But, a declining industry offers opportunities for businesses that operate well, have healthy margins and, more importantly—have cash on their balance sheet ready to deploy.

Being a Principal Contractor in the UK, you are heavily reliant on being competitive enough to win jobs through the public or private sector, which in general is just a race to the bottom with margins amongst the lowest in any industry. A big part of this is the layers upon layers of bureaucracy in the industry—all taking their fees whilst passing on the risk to the contractors. Fair enough—but i want more reward for my risk.

A couple of weeks ago i was presented with software that cut right through those layers of bureaucracy and went straight to the source of what we wanted to do as a company: buy land, build commercial buildings on it, and then sell or rent them. No estate agents to deal with, no developers, no consultants—no waiting around for people to do things for you. No tendering. A direct link to the landowner, with a service that even sent them letters with your offer.

It was great, but the problem was that the software was expensive and i declined their service. But, a few days later i sat and thought about the decision i’d made. With this software i could do everything remotely. i didn’t even need to leave my desk. By rejecting their service i was accepting that i was willing to carry on searching for land the old way; scrolling websites, communicating with estate agents, taking time out of my day to go and view the land, and relying on them to get back to me whenever they pleased. Not to mention the synthesised bidding wars they create.

i added up the time it would take for myself or my business partners to do all of this, and conservatively estimated that the minimum would be two days a week if we were limiting our search to the North West of England, and were taking it half-seriously. We are also unquestionably up against other companies who have whole departments dedicated to doing something similar, with better resources and more capital.

Once i looked at the maths—the cost of one of us doing this manually for two days a week, or 104 days a year (not accounting for holidays)—it dwarfed the annual cost of the software. That’s before any savings from going direct to the vendor and developing and building ourselves.

The opportunity cost of not purchasing the software was too high, so i made a call with my tail between my legs and changed course (not before getting two months free).

i don’t have a crystal ball and time will tell if the investment pays off, but by understanding the concept of opportunity cost—by being able to work out the present value of future cash flows—i’ve given myself a reasonable edge and sought to take back more control over my company’s future prospects.

And that’s what The School of Knowledge hopes to assist you with. Making better business and investment decisions. There are no rose-tinted glasses here—i call a spade a spade and look to share everything i’ve found useful in getting to where i am today.

If you’re an operator—someone who does things—and would like to read more about capital allocation, opportunity cost and net present value, click through to the following posts:

For paid subscribers, next Saturday i produce a deep dive into the most paralysing form of business strategy: Counter-Positioning. To read the first two articles in this series click below.

Until next time,

Karl.

Photo by nfcoooooooooooew: https://www.pexels.com/photo/aerial-view-of-lush-patchwork-farmland-in-summer-36249642/

The School of Knowledge is the weekly newsletter for SME owners and investors who want frameworks they can actually use — frameworks, checklists, and operating manuals every weekend, built to read on Sunday and use on Monday.

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If you’ve just subscribed — welcome. You’re in the right place.

This post will tell you exactly what to expect, who this is for, and where to start.

Who this is for

The School of Knowledge is built for three types of people:

The business owner who runs a profitable company but knows their decision-making could be sharper. You’re past survival mode. Now you want to allocate capital better, build systems that don’t depend on you, and think more clearly under pressure.

The operator-investor who puts their own money to work alongside running a business. You don’t have a fund manager. You have a balance sheet, a calendar, and your own judgement. You need frameworks that work in the real world, not the classroom.

The serious learner who is tired of business content that sounds good but doesn’t change how you act. You want ideas you can deploy on a Monday morning, not collect in a notebook.

If any of those sound like you, keep reading.

The 10 problems we solve

1. You consume more business content than you act on

2. You make capital allocation decisions without a repeatable framework

3. You don’t have time to read 400-page books or dig through case studies

4. Your mental models came from one industry — and they show

5. You understand your business operationally but not financially

6. You make decisions under uncertainty without a structured process

7. You can’t always explain your reasoning to others (or yourself)

8. You know what to do but not how to stress-test it before you do it

9. Your systems exist in your head, not on paper

10. You want to think like the best operators and investors — but most of what they’ve written is too abstract to use

What you get

Every Sunday, free: The Weekly — a short framework, decision, or question drawn from real operator experience. Always free.

Every Saturday, for paid members:

• The Lab — essays on mental models, systems, and ways of thinking. The big ideas, made deployable.

• The Case Library — deep research on businesses and operators. The kind of analysis that takes weeks to produce.

• The Toolkit — calculators, templates, and checklists. Things you download and use, not just read.

• The Nuts and Bolts — operating manuals for business fundamentals. Accounting, SOPs, decision frameworks.

• The Reading Room — book syntheses that pull the core ideas from 400 pages into something you can act on.

• Operator Interviews — conversations with practitioners who’ve built things, survived downturns, and made decisions with real money on the line. (Coming 2026)

Who writes this

I’m Karl. I co-run a construction company in the UK. Before that, I served in the Royal Marines.

The military taught me that plans are worthless the moment reality hits. What matters is how fast you adapt. Construction teaches me the same lesson every week — except now the consequences show up on a balance sheet.

I write The School of Knowledge because I need these frameworks as much as anyone. Everything published here started as something I built to solve my own problems. Skin in the game isn’t a tagline — it’s the standard.

Start here

If you’re new, these are the best places to begin:

• The Rumsfeld Matrix — a simple, powerful tool for making decisions under uncertainty

• How to Read an Income Statement — the financial literacy every business owner needs

• An Introduction to Capital Allocation — why it’s the most important decision a business owner makes

Go deeper

Two years of material, organised by theme:

• Capital allocation & investing — deep research on businesses, operators, and how the best allocators think

• Business fundamentals — operating manuals for the unsexy stuff that keeps companies alive

• Books & research — the core ideas from 400-page books, distilled into something you can act on

• Tools & templates — calculators, checklists, and frameworks ready to use

Want the implementation layer?

Free subscribers get The Weekly every Sunday. Paid members get the deeper piece every Saturday — the case study, checklist, or operating manual that turns that week’s idea into something you can act on by Monday.

The same tools I use to allocate capital and stress-test decisions in my own business. Not theory. Not motivation dressed up as strategy. Just the tools, clearly explained, ready to use.

One good decision pays for a year’s membership many times over.

£15/month. Less than a single business book. Cancel any time.

Join The School of Knowledge+

Not sure yet? Start free, read a few issues, and decide when you’re ready.

See you inside.

Karl

Jeff Bezos built a $2.9 trillion company on principles that are almost two thousand years old. He just didn’t explicitly say so. Nobody reads Amazon’s Leadership Principles and thinks: this is a philosophy of how to live. But they should.

Bezos built Amazon because he understood The Lindy Effect: if something has been around for 2,000 years, it’s likely to be around for another 2,000. Unlike Western nations, where state and religion are separate—Bezos didn’t believe in severance. He built into Amazon a culture where business principles and personal principles weren’t two different worlds, but one.

Have backbone; disagree and commit is the courage to go against the grain. Before starting Amazon, Bezos had a well-paid job on Wall Street. When Bezos told his boss he was leaving, his boss gave him two weeks to think it over, but Bezos quit anyway. Deciding what to do in life—your purpose—is inherently hard, but perhaps Bezos listened to what Seneca had to say:

“Each time you want to know what to pursue or what to avoid, look to your highest good, the aim of your life as a whole. Everything we do ought to be in accordance with that aim. Only one who has the entirety of his life in view is in a position to arrange life’s particulars. Even with paints all at the ready, no one can render a likeness until he has decided what he wants to paint. That’s our mistake: everyone deliberates over the parts of life; no one over life as a whole.”

Bezos wasn’t looking at creating Amazon as a side project. He was looking to create his life’s work. If you align your work principles with your personal principles, you create consistency in everything you do.

Frugality is another example of that consistency—and perhaps the most counterintuitive one.

In the early days at Amazon, Bezos had employees use old doors as desks rather than buy new furniture, and reportedly still gives out a “Door Desk Award” to employees who find innovative ways to save money. This wasn’t about being cheap for accountancy reasons: it was to breed a culture of frugality into Amazon. Constraint breeds resourcefulness and self-sufficiency, and leads to invention: overconsumption leads to softness, bloat, and excess, which corrupt judgement.

“It is in times of security that the spirit should be preparing itself to deal with difficult times; while fortune is bestowing favours on it then is the time for it to be strengthened against her rebuffs.”

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That’s the Stoic parallel.

It’s easy for companies to get fat when food is aplenty, but Bezos was distilling in the Amazon culture what Seneca prescribed in the individual: use the good times to prepare for the hard ones.

The same logic runs through Amazon’s approach to trust (justice).

Bezos was famously willing to forgo profits for years to earn customer trust at scale because he valued their loyalty more than his bottom line. By obsessively focusing on customers in the form of low prices and maximum choice, he earned their trust. This discharging your duty to others, even when it’s costly to you in the short term, reminds me of what Seneca said:

“All his thoughts should be as distant as possible from personal advantages.”

It’s easy to scowl now (with the benefit of hindsight) that Bezos is a billionaire, but he wasn’t when he wrote these principles. What Bezos had to do, to instil in the Amazon culture, was to be right—and be right a lot.

At first this leadership principle looks a bit self-promotional, but to have any chance at doing anything well in life you have to be more right than wrong. It sounds overly simplistic, but aside from helping one’s ego, being right also builds something else—judgement. Or as Seneca would say: wisdom.

Judgement isn’t something you can read your way to. It’s built through decisions made, mistakes owned, and patterns recognised over time. That’s what Bezos was encoding—not a principle about being clever, but about developing the kind of wisdom that only comes from being in the arena.

“Besides, what grounds could I possibly have for supposing that a person who has no acquaintance with books will never be a wise man? For wisdom does not lie in books. Wisdom publishes not words but truths—and I’m not sure that the memory isn’t more reliable when it has no external aids to fall back on.”

Amazon’s 14 leadership principles are corporate speak, but I knew there was more to it than that. They were a philosophy: a set of beliefs and guiding principles that worked just as well professionally as they did personally.

The reason Bezos, or anyone interested in building something lasting, reaches for 2,000-year-old principles is because time distinguishes principles that work—from those that don’t.

Are your professional principles different from your personal principles? If yes, asking yourself why might just be the best decision you’ll ever make.

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If these are the kinds of questions you find yourself returning to—how the best builders think, what philosophy looks like applied to business—that’s what The School of Knowledge is for. You can find out more by clicking below:

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Until next time, Karl (The School of Knowledge).

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When a product launches it attracts initial users. If the product is popular, more people flood to use it, making it even more popular. As it grows in popularity and user numbers, more people begin to use the product until it reaches a tipping point of no return. This self-reinforcing feedback loop is the power of Network Economies.

This phenomenon is behind the explosion of companies like Meta (Facebook), Uber, LinkedIn and TikTok. Meta and TikTok become more valuable as people use the apps to communicate and share their lives with friends and family. LinkedIn becomes more valuable as more professionals join the network, meaning you no longer have to physically go out to network. As more people use Uber, more drivers join, and the days of queuing up in the rain at a taxi rank are over.

Not only do they create more value as they become ever more popular, but they also become increasingly difficult to move away from as user count increases.

If Scale Economies is math: Network Economies is psychology.

This is the third piece in the 7 Powers series — a deep-dive into Hamilton Helmer's framework for understanding how businesses build durable competitive advantage. If you're new to the series, the introductory piece explains why value creation alone isn't a moat, and the second piece on Scale Economies uses TSMC and Intel to show how cost structures become competitive weapons. This piece covers the second Power: Network Economies.

What Are Network Economies?

Let’s first define what Network Economies are:

A business in which the value realised by a customer increases as the installed base increases. — Hamilton Helmer

I was listening to an Acquired1 episode on Meta this week in preparation for this article and was blown away by a fact. Meta has 4 billion users (of which 3.5 billion are active daily users) across Facebook, Instagram, Messenger and WhatsApp. That’s nearly half of the world’s population. TikTok has an estimated 1.5–2 billion active daily users and LinkedIn roughly 1 billion. These apps have become part of people’s routines, and to a certain extent—their lives.

I remember when WhatsApp first came out. I had some friends who used iMessage to communicate and others through BlackBerry. WhatsApp came along and created an ecosystem where it didn’t matter what type of phone you had, because you all used the same messaging platform. It became very sticky. And that was the point. WhatsApp with some friends using it was mehh, but WhatsApp with all of your friends was everything. Especially as a teen.

Now think about professional networking. There’s nothing wrong with meeting up for a coffee, or going for a few social drinks (i’m quite partial myself), but professionals are busy people. LinkedIn looked to solve the problem of people wanting to network more, but struggling to balance their professional and personal lives, by creating a professional networking platform available 24 hours a day, 365 days of the year. Of course, there’s nothing they can do about some of the utter cringe people put on there. Perhaps it adds to its appeal.

The key difference between Network Economies and Scale Economies is this: unlike Scale Economies, where your costs come down from having volume—in Network Economies the value of your product increases from having volume. By volume I don’t just mean having lots of customers—that’s market share. The volume of people using a product must materially increase its perceived value to existing users.

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Types of Network Effects

Direct Network Effects

Social media has direct Network Effects: more users = increased value for existing users. Skype had this too. Just like WhatsApp, it was useless unless the person you wanted to reach had it. Going analogue, when Alexander Bell’s telephone patent expired in 1894, hundreds of independent companies launched as the craze for telephones was booming. AT&T’s response was to refuse the independent companies interconnection—if you weren’t on their network, you couldn’t call their customers. Their network was more valuable because they could reach more customers.

Currency and language are two of the oldest Network Effects you can think of. The dollar (or Bitcoin) has zero utility as a standalone item unless people adopt it and actively trade with it. Remember—before currency, people traded silver, gold, bread, camels and daughters! Much to my dismay (as i’d love to learn a new language), the world has adopted the English language as its preferred second language. The more people speak English, the more people from non-English speaking countries want to learn it. It doesn’t matter that there are more Indian and Chinese speakers than there are English.

Indirect Network Effects

Black cabs used to rule the roost in the UK. If you wanted a taxi in central Manchester or London, you’d do well to find a cab that wasn’t a black cab. Enter Uber. The more drivers Uber put on the road, the more people used their app. The more people used their app, the more drivers signed up to taxi for Uber. This is indirect Network Effects, or two-sided platforms. It works the same way with eBay. eBay on its own wouldn’t be much use to anyone, but the more people that list stuff on eBay, the more people buy. Once eBay becomes more popular, even more people want to sell stuff on eBay, encouraging even more people to buy.

Amazon created this feedback loop through FBA (Fulfilled by Amazon), except it has a triple benefit: the seller, the buyer and Amazon. Win-win-win.

Value comes from at least two different groups benefitting each other.

Data Network Effects

Tesla states on their website that their Full Self-Driving2 cars have been trained on “over 100 years of anonymous real-world driving scenarios” from a fleet of over six million vehicles, and that the fleet “collectively experiences a lifetime of driving scenarios in 10 minutes.”. By mid-2025, Tesla’s fleet was reportedly adding around 15 million miles a day. Although Google is currently leading the way on fully autonomous cars, this amount of data collection from Tesla is staggering. Musk said himself that this data had increased AI training compute by 400% in 2024 alone. This data is used to produce better products for Tesla and train their AI.

Platform Network Effects

Through the iPhone, Apple created one of the best examples of Platform Network Effects: iOS. Apple’s apps alone are powerful—having an iPhone is like having a little computer that fits in your pocket—but throw in Apple’s App Store, which opens it up to third-party developers, and you have the world at your fingertips. The value isn’t created from individually having an iPhone, but from third-party developers offering the user roughly 2 million apps.

Other examples include: Obsidian allowing third-party developers to create community plug-ins, Shopify’s app store, Amazon AWS, and Visa by connecting cardholders with merchants.

Hybrid

The truth is many companies have multiple types of Network Effects: Apple, Amazon, Uber. The apps or products they create serve more than one person or group, their perceived value increases as more people use them, and they all collect swathes of data that they use to create even better products.

Benefits & Barriers

The Benefit

The benefit of Network Effects is clear: the value of a product increases as more people adopt it. The sheer scale of audience capture can lead to rapid growth, increased popularity (further increasing audience), and outside investment. Companies that are in a leadership position with Network Economies can charge higher prices than those whose products are perceived to offer less value, because audience volume is substantially less.

The Barrier

Competing with a company that has genuine Network Effects can be costly. The cost of gaining market share (customers) can have a substantial negative impact on the opponent’s P&L as they battle to incentivise people to defect to their product. But nobody likes to arrive at an empty party. For developers, this means they need to create a space that will attract the most people in the quickest amount of time—but reputable socialites always arrive late, when the house is full. The platform you’re reading this on has done a pretty good job at convincing big household names to move onto the platform in the last 12 months. This makes Substack even more appealing, which in turn will bring in even more household names. Most companies create benefits—but barriers are what create long-term differential returns.

Companies that have true Network Effects often exhibit winner-take-all scenarios, and competition has two options: 1) fight (and probably lose), or 2) create something novel.

Some barriers may look like genuine Network Effects, but features aren’t a barrier. At least not a durable one. When Snapchat came along with their novel feature “stories”, people loved it. Who’d have thought it, aye. But creating timed disposable videos isn’t a sustainable moat, and for Snapchat the water dried out—when Facebook had enough data to validate the idea, they copied them. So did Instagram (owned by Meta). People still use Snapchat (just Snap now), but their novel idea wasn’t structural—it was too easy for a competitor to rob their idea for their superior network to benefit from. Companies can also match your pricing, but if they don’t have the volume those profits will take a battering unless they have a substantial cost-saving benefit—or scale advantage.

The astute business strategist knows to look for the barrier conditions first—why can’t customers leave this network, not why did they join in the first place.

Case Study: Meta’s Dominance

Network Effects are perhaps the most potent of Helmer’s 7 Powers, but many strategists miss one critical distinction: Network Effects do not automatically constitute Power. For there to be genuine Power there must be durable differential returns and immunity from competitive onslaught. Meta Platforms unconditionally demonstrates Helmer’s conditions for Power.

Mark Zuckerberg launched “TheFacebook” from a Harvard dorm room on 4th February 2004, and within 24 hours, 1,200 people had joined. Initially limited to .edu emails, Zuckerberg paired exclusivity with intoxicating FOMO effects, and within a month over half of Harvard’s undergrads were on the platform. Facebook reached 1 million users by the end of 2004, 100 million by 2008, and crossed 1 billion monthly active users in October 2012—making it the first social media platform to do so. Meta’s sheer reach defies comprehension: 43% of the world’s population use Facebook, Instagram, WhatsApp, Messenger or Threads daily, and 48% monthly. Facebook alone has 2.1 billion active daily users, with a 60% daily retention rate. These numbers mean that nearly every other human being you see on Earth uses one of their products each month.

The company’s market cap has grown from $81.7 billion at its 2012 IPO to $1.66 trillion as of writing, representing a compound annual growth rate of roughly 24%. This includes a 76% peak-to-trough decline in 2021–2022, driven by metaverse spending concerns, Apple’s App Tracking Transparency hit, and TikTok competition. Let’s not forget the Cambridge Analytica scandal in 2019 either. Zuckerberg trimmed the company by cutting 21,000 jobs to refocus on AI, and from the trough in October 2022 the stock would rebound over 500% (it would later come down again due to capital expenditure fears).

A £10,000 investment in Facebook on the day of its IPO would be worth roughly £170,000 today.

The Failed Challengers

Facebook has boxed many a round with challengers including: Google+, Snapchat, MySpace, Ello, Peach, Vero, Diaspora, Path and Friendster. How was Facebook able to fight off these companies—especially Google, with its billions of capital and users already integrated into its ecosystem? Because Facebook had genuine Network Effects. These companies may have had a product that users would benefit from if they switched—but they never figured out why users would want to leave: the barrier.

TikTok represents the most sincere competitive threat to Facebook, as they pivoted to a different network: teenagers—who weren’t yet embedded in Facebook.

People regularly complain about the Meta ecosystem saying they want to leave, but the numbers don’t show that. User numbers are increasing year on year. Facebook has had numerous scandals: Cambridge Analytica, data breaches, privacy violations, content moderation failures, mental health concerns, antitrust investigations. Any one of these would sink most companies. Yet last year advertising revenue increased 22.1% to $196.2 billion, accounting for nearly 98% of total revenue.

Saying you want to leave is one thing, but not being able to because you’ll lose access to your network is textbook Network Economies.

Meta has compounded its revenue at 27% a year for the last 10 years. They consistently carry gross margins of 80%+ and have left a graveyard of competitors in their wake. You’ve seen how Facebook built the world’s largest social network. But here’s what separates Network Economies from every other Power: your customers become each other’s switching costs.

In the complete essay, you’ll discover:

• Why Google couldn’t beat Facebook: Despite superior technology, unlimited capital, and Google’s distribution power, Google+ failed catastrophically. The barrier wasn’t technical—it was structural.

• The Three-Question Diagnostic: Determine if network effects are strengthening or weakening—critical for investment analysis

• When networks collapse: The specific conditions under which network effects reverse and platforms die (MySpace, and what nearly killed Facebook)

• Five Red Flags: Red flags to watch out for when analysing companies that might show structurally weak Network Effects

Subscribe to The School of Knowledge+ to get the complete framework for identifying and analysing Network Economies—the Power where growth itself becomes the barrier. For this series I am offering a lifetime 20% discount for those who join:

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Two companies go head-to-head competing for market share in the digital streaming industry. Each has excellent management, brilliant content, and state-of-the-art facilities, but one company has something the other doesn’t—numbers.

Company A has 20 million subscribers and Company B has 100 million. If both companies spend $100 million on creating original content, it’ll cost Company A $5 per subscriber, but Company B only $1. Basic maths states Company A is going to have a hard time competing against Company B because it costs them five times more to make the same product. What’s Company A to do?

The obvious solution would be to cut the price of their subscription fee, ensuring it’s materially lower than Company B’s. However, Company B, being the astute strategists they are, know this play and drop their prices to match. This folly favours Company B — with lower fixed costs and higher margins protecting them from competitive onslaught. Company A, with higher fixed costs and lower margins, feels the squeeze and retreats gratefully back to the trench it came from.

This is Scale Economies at work.

Scale Economies create a moat not just through size, but through the prohibitive costs a challenger must pay to reach the incumbent’s efficiency.

This is the first deep-dive in the 7 Powers series. Hamilton Helmer’s landmark book on how businesses use strategy and value creation to create consistent differential returns — something he calls Power. In the introductory essay, I explained why value creation alone isn’t a moat. Now let’s examine the first Power that separates good businesses from great ones.

What Are Scale Economies?

“A business in which the per-unit cost declines as production volume increases.” — Hamilton Helmer

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Scale Economies is fundamentally about structure — not operational efficiency. When Netflix decided to move away from leasing film studio properties to creating originals, they solidified an element of their business model that had long had variable costs attached to it. If the film studios set a price for a property lease, there wasn’t a lot Netflix could do — but by creating originals, they now set the budget. If they wanted to spend $100 million on an original, that’s what they’d spend, and the more their subscriber base grew, the lower their costs were per original.

This is what Helmer means by “per-unit cost declines as production volume increases.”

The Different Types

Scale Economies can emerge through multiple mechanisms:

Fixed costs: High upfront capital expenditure (factories, equipment, R&D) spread over increasing volume. Netflix originals, semiconductor fabs, software platforms.

Volume/area relationships: Utilising production area to increase volume results in lower per-volume costs. Refineries and warehouses.

Distribution network density: As distribution networks grow denser with more customers per area, delivery costs decrease through more economical routes. Amazon Prime delivery.

Purchasing power: Large-scale buyers negotiate better pricing than smaller companies. Walmart, Costco, supermarkets.

Learning economies: Knowledge that reduces costs or improves quality, tied to production levels. Experience compounds over volume.

Benefits and Barriers

Benefits are more common in business: pricing power, cost reduction, lower operating costs. But barriers — those that prevent competitors from engaging in tit-for-tat tactics — are less so.

Benefit: The conditions that created the Power must materially grow cash flow through increased prices, reduced costs, or lower capital expenditure.

Barrier: As well as persistently increasing cash flow, there must be a barrier that prevents competitors from engaging in value-destroying arbitrage.

Barrier conditions deserve your utmost attention. Scale Economies can only exist when the cost advantage is material enough to change competitive behaviour — when competitors purposefully decide not to engage because it’s economically inefficient to do so.

Case Study: Taiwan Semiconductor Manufacturing Company (TSMC)

TSMC produces approximately 60% of the world’s semiconductor chips and over 90% of the most advanced chips. Their semiconductors can be found in modern cars, industrial sensors, and power management chips. Advanced chips — requiring more processing power — are found in iPhones, MacBooks, and AI processors.

TSMC isn’t a chip designer: Apple, Nvidia, AMD, et al. design their own chips, and depending on the complexity of manufacturing, that chip will almost certainly go to TSMC, where they’ve built an insurmountable moat. This is called a “foundry” business — they’re a fabrication plant for hire.

Their operating margins are consistently 40–45%, while their nearest competitor Samsung’s foundry business margins sit at 10–15%. Intel, who entered this market in 2021, has negative margins. Over two decades, these margins haven’t compressed. They haven’t been eaten away. TSMC is able to consistently create that determining factor of genuine Power: persistent differential returns.

The fixed cost base

TSMC’s fabrication plants cost between $20–30 billion to build. They’re filled with dozens of ultraviolet lithography machines costing in excess of $150 million each, run by thousands of people with PhDs, spending $3–4 billion annually on R&D developing the next generation of manufacturing processes.

That’s an eye-watering amount of capital expenditure. They have 12–13 operating fabs across Taiwan and Japan, with each fab having multiple phases, meaning the total number of operating fab phases is closer to 50.

And there’s more to come. TSMC is currently expanding to Arizona, where they plan to build 3–6 new fabs, two advanced packaging facilities, and an R&D centre totalling an estimated $165 billion. There are plans for 2–3 more in Japan, one in Germany, and one more back home.

Imagine trying to compete with that.

The volume advantage

TSMC can invest that kind of capital because they have the volume. TSMC produces 13x more wafers than Intel and 50x more than Samsung’s advanced foundry nodes. Intel and Samsung simply don’t have the volume that would enable them to invest in the kind of infrastructure and research needed to close the gap on TSMC.

What creates a barrier your competitors can’t cross?

You’ve seen how TSMC built their fortress. But here’s what separates genuine Power from temporary advantage: the barrier must be insurmountable. In the full essay, you’ll get:

• The complete TSMC breakdown: Why Intel can’t catch up despite 60 years of experience and unlimited capital

• Surplus Leader Margin explained: The simple calculation that reveals whether any business has genuine Power

• The diagnostic framework: Three questions to determine if a company has Scale Economies or just operational leverage

• When Scale is a trap: The red flags showing when chasing growth destroys value

• What separates TSMC from everyone else: Why most industries will never achieve this Power

This is the foundation for the entire 7 Powers series. Subscribe to get access to this essay plus the full breakdown of each Power, complete with frameworks for analysing any business.

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The barrier: Why Intel can’t catch up

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The quote comes from Amazon’s 2017 shareholder letter “Building a Culture of High Standards”, and demonstrates Bezos and Amazon’s perpetual drive in creating customer value. They obsessively sought to create value through a lens that put the customer front and centre of every decision they made. The company’s worst drawdown occurred from the dot-com bubble and saw them lose 94% of their stock value, but they continued steadfast in their mission. They would continue to provide customers of Amazon with as much value as possible through product differentiation and cheaper prices, weathering the storm through an unwavering commitment to customer experience over short-term profitability.

Every business provides some form of value in the products or services they sell, but value-creation alone isn’t a sufficient strategy in shielding a company from competitive onslaught. Every company needs a strategy for not only creating value—but creating structural barriers to shut their competition out. Something that places the company on a perch.

Amazon’s was optionality, cost and speed. Something Nick Sleep from Nomad Investments termed shared economies. Many companies don’t know their true value, others refuse to seek better value through fear of the sunk cost fallacy, and many don’t have any at all.

Let’s look at the story of two companies: an entertainment household name—infamous amongst boomers and millennials, and the other; a disrupter who looked at the same business model through a completely different lens.

People of a certain age will remember Blockbuster. The place you’d go to rent videos for the family to sit around and watch on a Saturday night when we didn’t have the world at our fingertips. It had a robust business model built around families, couples, friends or movie lovers sitting down and watching their favourite movies together for a reasonable price. The cinemas must have hated them.

But then came DVDs. A direct threat to VHS, and to Blockbuster themselves.

Blockbuster initially snubbed the new technology, and in 1997 even rejected a deal with Warner Bros to rent new releases before they went on sale to the public because they were asking for 40% of rental revenue in return. But in September 2001, Blockbuster finally made their move into DVDs, and announced a reduction of 25% of their VHS inventory to make way for them.

Too little, too late.

The entertainment household name adapted when they had a change of heart towards DVDs, but fatally, they continued with their brick-and-mortar business model. The disrupter—Netflix—saw it differently.

Netflix has long been championed for seeing in DVDs what Blockbuster didn’t—the future. Their DVD-by-mail business was akin to what Jeff Bezos did to retail book stores when he created Amazon. Bezos transformed a capital-intense business model—one requiring high and growing capital expenditures, with physical stores capable of offering only a few thousand books, into a distribution network capable of delivering nigh on every book ever published.

But crucially, Netflix saw past their own nose towards the horizon—digital streaming.

DVD-by-mail and digital streaming are two separate industries, with their own economics, and the prospects of entering the digital streaming industry didn’t look all that appealing. IT costs were getting cheaper by the year; cloud storage was expanding, and with it costs plummeting. The barrier for entry seemed to be getting lower—not higher, and so too was the prospect of making it a viable business model. But Reed Hastings and his team at Netflix were strategists. They knew it was only a matter of time that digital streaming would do to them what they did to Blockbuster. They decided that if they were going to be killed anyway—they’d do it on their terms.

In 2007 Netflix tentatively entered the digital streaming industry by partnering with electronic hardware specialists. They didn’t bet the house and go all-in. They did the leg-work, allowed themselves exposure to this emerging market, and gained the much needed experience before making any big moves. While smart, these tactics aren’t a strategy, and any potential for Netflix to gain a clear competitive advantage in this industry was at the very best muddy.

The way streaming businesses worked back then was like this: streaming platforms like Netflix negotiated for streaming rights with film studios. But the film studios were astute and strategic custodians of their properties, and it was them that held power over the new kids on the block. They split their properties up by geography, region, release dates, contract length, and so on. It’s the equivalent of wanting to get a new iPhone where the contract provider determines the amount of minutes, text and data you get, as well as the price and duration of the contract.

Netflix fought for scraps for 4 years, until 2011 where they finally made their move. Ted Sarandos, Netflix’s Chief Content Officer, believed it vital that Netflix secure exclusive streaming rights to certain properties. It was exactly this type of thinking that would allow Netflix the potential to finally gain power over the film studios: they were going to start creating originals. This shift—from being controlled by the film studios—to creating their own content was not only expensive, but risky. This move was as bold as it was ingenious.

By taking this route, Netflix was now playing a different game. A game of one. Creating originals, such as the hit House of Cards (with that infamous Kevin Spacey look), and gaining exclusive rights to content, would mean that other streaming platforms would have to up their fixed-costs to compete with Netflix, or remain beholden to the whims of film studios. If House of Cards cost Netflix $100m to make, and they had 30 million subscribers, then the cost per customer was just over $3. If a competitor had only one million subscribers, then the cost per customer to make the original would be $100. They created a 10m-high iron-clad barrier where none was before, and told those who wanted to compete they’d have to pay up to do so.

This radical shift in industry economics allowed Netflix to move away from the value-destroying commodity rat race they found themselves in. Value-creation wasn’t enough—it was the barrier that mattered.

How companies create value, and how they ensure they leave their competitors in the rear view mirror, is laid out by Hamilton Helmer in his landmark book on analysing businesses: 7 Powers. Helmer has spent decades trying to work out what separates a bad business from a good one, and a good one from a great one. He starts with two definitions of strategy that answer two distinct questions—one about the nature of value, the other about how to capture it persistently.

Strategy

The study of the fundamental factors that drive potential business value.

The diagnostic lens: what are the foundations of value in this business?

Strategy has two objectives: to reveal the foundations of business value—and attempts to guide businesspeople towards value-creation. It can be split into two topics:

1. Statics: “Being There”: What makes Netflix’s content so durably valuable?

2. Dynamics: “Getting There”: What elements helped produce such favourable results?

Looking back at our Netflix case study, we can see that Netflix’s decision to depart from conventional norms and create originals was what set them apart from other streaming platforms, but also what made their business model so durable and valuable. This is the difference between static value—the structural advantage they hold—and the dynamic quality that allowed them to build it in the first place.

strategy

The set of conditions creating the potential for persistent differential returns.

The competitive lens: what conditions allow a company to hold that value against rivals?

Persistence is a non-negotiable element in creating long-term differential returns. 10% growth—per year—for three years, would only constitute 15% of a company’s value. Having stellar returns for three years, and then poor returns the next three, is unlikely to create durable long-term differential returns. How could it? Value is what gives rise to persistent and above average returns. It’s all about establishing and maintaining an unassailable perch.

These differential returns give rise to Power: the underlying conditions that give a company a consistent and unfair advantage over its competitors. This is as difficult to achieve as it is important, but can be attained through two means:

1. Benefit: The conditions that created the Power must materially grow cash flow through a combination of increased/decreased prices, reduced costs, or less capital expenditure.

2. Barrier: As well as persistently increasing cash flow, there must be a barrier that prevents competitors from engaging in value-destroying arbitrage.

The astute business strategist knows to look for the barrier conditions first—not the benefit.

Benefits are more common in business: competitive pricing, cost reduction, operational efficiency. But barriers—those which prevent competitors from engaging in tit-for-tat tactics—are less so. Companies that know what a competitor is doing, but won’t engage in trying to replicate them through fear of destroying their own value proposition, do not have Power—at least not yet. Therefore it is barrier conditions that first deserve the strategist’s attention.

An industry’s underlying economics and a business’ specific competitive advantage must interact in ways that are favourable for Power to exist.

You can measure strength, but the concept of Power is relative. When comparing a company’s Power over a competitor, you’re looking for what is measurable—their strengths—those which have the potential to translate into Power.

Good strategy not only requires you to seek out Power (and potential Power) between direct competitors, but indirect ones as well. After all, Power changes hands like a clock face changes time. Value-destroying actions are linked to poor execution of strategy and following conventional wisdom. No business is immune from a fall from grace.

Value gets you to the final. Power is having your name written in the history books.

Through value-creation and impenetrable barriers, Bezos propelled Amazon towards trillions in market cap. Netflix established itself as the number one streaming platform. Helmer didn’t invent these principles. He found them—in companies like Amazon and Netflix—and codified them into a framework any operator can apply.

Here’s what most business owners miss: they can articulate the value they create, but they can’t name the structural barrier protecting it. They know their strengths but confuse them with Power. They work harder, improve operations, cut costs—all necessary, none sufficient.

The question for your business isn’t whether you create value. It’s whether you’ve built barriers that prevent competitors from taking it from you.

Helmer identified seven specific types of Power. Seven structural advantages that, when present, create persistent differential returns. Some you can engineer deliberately. Others emerge only under certain conditions. Knowing which is which is the difference between wasted effort and compounding returns.

But here’s the problem with Helmer’s book: it’s written for investors analysing public companies, not operators running them. The frameworks are sound, the case studies compelling, but they don’t answer the question every business owner needs answered: How do I know if I have this? And if I don’t, can I build it?

That’s what the 7 Powers series does.

Over the next seven essays in this series, I’ll break down each Power—not as an academic exercise, but as a diagnostic framework you can apply to your own business. Each essay will include:

• The anatomy of the Power: what it is, how it works, and why it creates barriers

• Recognition criteria: the specific conditions that signal its presence or absence

• Application for SME operators: how construction firms, professional services, and capital-intense businesses can identify opportunities to build each Power

• Diagnostic tools: checklists, frameworks, and questions that move you from theory to action

The first Power we’ll examine is Scale Economies—the same advantage Netflix used to turn content creation from a liability into an unassailable moat. We’ll look at how fixed costs spread over volume create barriers, when scale becomes a trap instead of an advantage, and how to identify whether your business has the potential to build this Power.

If you’re serious about building a business that compounds value rather than just creating it, this series is where theory meets application.

Until next time, Karl.

The 7 Powers series is part of The School of Knowledge, where I translate sophisticated investment frameworks into actionable tools for business owners. £15/month gets you access to the full series, The Case Library, The Toolkit, and The Reading Room which i’m offering to you today, plus access to everything else, for a 20% discount.

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Here’s a roundup of everything I found interesting or useful last week:

📚 Books

I’ve wanted to read this book for a long time and have just got through the first chapter—scale economies. Absolutely can’t wait to share my thoughts with you.

💭 Quotes

A great quote on perspective:

📜 Articles

Lots of useful advice on how to organise your notes. Konik’s idea of synthesis notes has closed a loop i’ve long wanted to close. A must read for those who take digital notes and especially if you use Obsidian.

Manuscriptions

🌲 The Konik Method for Organizing Electronic Notes

Back in 2022, my article outlining the Konik Method for Making Useful Notes won Obsidian October and was widely shared in notetaking communities — although it was written before my migration to Substack so alas, all the comments are lost. Now that it’s been three years (!) I thought it might be useful to explain how technological changes (like the rise …

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7 months ago · 36 likes · 17 comments · Eleanor Konik

NotebookLM is a power tool and Eva, from Lifelong Learning Club gives you a fantastic overview, including use cases on how to get started in under 5 minutes.

Lifelong Learning Club

A Short, Yet Useful Guide to NotebookLM

The Lifelong Learning Club is your place for applying evidence-based learning strategies so you can learn faster, remember what you read, and use AI to augment thinking, instead of outsourcing it…

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3 months ago · 75 likes · 25 comments · Eva Keiffenheim MSc

🎧 Podcasts

Peter Kaufman shares his advice on the importance of multidisciplinary thinking, along with why he thinks reciprocation is one of the most important skills you can develop—and why you must always go first.

❓Questions

A great question posed by Lifelong Learning Club on using AI to build expertise, including my response. What are you thoughts?

Lifelong Learning club: You cannot evaluate what you do not understand. You can only know what “good” AI output looks like if you already know the subject deeply.

What do you think are the implications for learning? Is procedural fluency (knowing how to produce the work) a prerequisite for evaluative fluency (knowing how to assess and improve the work), or can we shortcut straight to expert judgment via alternative learning pathways?

The School of Knowledge: I would say in general your level of analysis is surmountable to your level of expertise. I don’t think you can shortcut your way there, but I can see how AI could accelerate learning through quicker feedback and iteration in certain domains. However, you still have to do the work. Even then, there’s no guarantee you’ll be an expert, or in fact better at all if your learning practices are poor.

If I want to become a better essayist —AI can give me advice on formatting, voice, punctuation, and link the best 100 essays for me to read and learn from. It could do all of that in seconds/minutes. AI can spot patterns and draw conclusions from these essays—but if I can’t, what am I achieving? And if AI is identifying expert level patterns and offering them to me on a silver platter, am I developing expert judgement?

“To understand is to know what to do” - Ludwig Wittgenstein

Or, perhaps:

“To understand is to know how to see”

To comment on the thread just click through below:

👀 Incase you missed it

A round up articles I published in Jan (note, I was pretty ill for a few weeks so wasn’t a great deal).

*Photo by Pixabay: https://www.pexels.com/photo/low-angle-photography-of-grey-and-black-tunnel-overlooking-white-cloudy-and-blue-sky-210158/

Charlie Munger said that to get ahead in life you need to understand the basic concepts of the hard sciences: physics, chemistry, engineering and maths. And while accountancy is more art than science, it should go without saying that every investor—whether you buy stocks, real estate or commodities—and every current or aspiring business owner, should be able to understand and interpret financial statements.

Why?… because your capital depends on it.

Regardless of how much money you do or don’t have—nobody likes to lose it. Especially not to ignorance.

Financial statements are broken down into three main documents: the income statement, balance sheet and cash flow statement. Today we’ll be going through the income statement and breaking down what each line means. This document lets you know if the company you own or stock you want to buy is profitable.

But don’t take my word for it. Here’s an excerpt from the brilliant book Financial Intelligence:

“Learn to decipher this document, and you will be able to understand and evaluate your company’s profitability. Learn to manage the lines on the income statement that you can affect, and you will know how to contribute to that profitability. Learn the art involved in determining profit, and you will definitely increase your financial intelligence. You might even get where you are going.”

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To help put the scary and confusing definitions into context, we’ll be using Amazon and Visa as example companies. One of them (Amazon) produces products and services and the other (Visa) is a service-based company that collects fees on transactions. Both are well known for what they do, and you should always start with companies you already know a lot about.

This is an in-depth one, so you might want to bookmark this in case you want to come back to it. If you’re reading this in email and the email is truncated click on "View entire message" and you’ll be able to view the entire post in your email app.

A Few Tips Before You Start

Where to Find Them

When you want to read a company’s financial report, you have some options on where you can find them:

1. Investor Relations Pages: Most large corporations will have dedicated “investors” or “investor relations” sections on their website where an archive of their reports will live in PDF for you to read/download.

2. Third-Party Aggregators (free & paid): AnnualReports.com: A free directory of annual reports for listed companies across the UK, US, Canada, and Australia. Financial News & Portals: Sites like Yahoo Finance and the Financial Times (FT) Markets Data often provide links to annual reports on their company “tearsheet” pages. Specialised Databases: For deep research, subscription services like FAME (for UK/Ireland), S&P Capital IQ, and LSEG Data & Analytics provide consolidated financial data and original filing images. I personally use a paid service called Fiscal.ai, who also offer a free version (no affiliation).

3. Official Government & Regulatory Portals (free): Companies House (UK), EDGAR / SEC (USA), SEDAR+ (Canada), for example.

Or, just type in “COMPANY NAME annual report” into your favourite search browser.

Nomenclature

When reading financial statements, you’d have thought that there would be concrete wording for each definition but alas, there isn’t—there are multiple names for the same thing. Sales, top line, turnover and revenue aren’t different things—they’re the same. Net profit is also known as bottom line, net income, net earnings and net income after taxes (NIAT). At first this can be confusing, especially when looking at income statements from different companies, but I’ve tried to make it as easy as possible to understand by breaking down the income statement into six key components which I list before reviewing Amazon and Visa’s income statements.

Standardised vs Reported

Probably a bit beyond this article, but you should know that companies have to follow certain rules when it comes to financial statements. Depending on where you live, these might be called GAAP, US GAAP, IFRS or something else. The basis for these complicated accounting rules is to “standardise” how companies report their numbers so that the average Joe (and investor) can understand them as there is continuity across reports and companies. Most companies also report non-GAAP figures in their reports, as they may believe it represents a better picture of the company’s actual financials.

What Currency Is It In?

This might sound obvious but shouldn’t be overlooked. Be sure to check whether the numbers are in pounds, American/Canadian dollars, euros or something else. If you want to convert that currency back to your own, remember that the currency conversion rates might be different today from the reported numbers. This is where online websites excel over print or static copies because many allow you to select the company’s local currency, USD, or the currency of your country and convert the numbers for you.

Thousands, Millions or Billions?

Are the numbers you’re reading in thousands, millions or billions? At the top of each statement, the company should state what the numbers are “rounded” to. Here’s a screenshot from Visa’s 2025 Annual Report that tells you the numbers are in “millions.”

Before we begin, have a quick look at Amazon and Visa’s “statements of operations” which is just their way of saying... income statement, and have a go at guessing what you think the definitions mean, how both companies differ slightly, and why.

Visa

Amazon

To better understand the income statement, you can break it down into six key sections: 1. revenue, 2. operating expenses, 3. operating profit, 4. non-operating income, 5. taxes, and 6. net profit. That’s it.

Beyond that, you can introduce ratios, margins and percentage changes to the numbers to help assist you with your analysis of a company. A word of warning though: up isn’t always good and down isn’t always bad. Remember when I said it’s more art than science?

Let’s get into it.

1. Revenue

Visa calls it net revenue and Amazon calls it net sales (broken down into products and services) but they’re the same thing. It’s the total amount of money the company has charged its customers from selling its products or services over a given period and before costs are deducted. Revenue can certainly make you gleeful when first looking at it but revenue certainly isn’t profit. At least not yet.

Visa

Amazon

* You’ve probably noticed that Visa’s latest year is on the left hand side and Amazon’s is on the right. Don’t ask me why but be aware—there are little traps everywhere trying to trip you up if you’re not paying attention.

Revenue should only be recognised when a product or service is delivered. Here are some differences between when Amazon and Visa recognise revenue:

1. Amazon (Direct Sale): When you buy a $100 Echo from Amazon’s own inventory, they record the full $100 as revenue. They are the “Principal” in this transaction.

2. Visa (The Fee): When you use a Visa card for that same $100 purchase, Visa doesn’t count the $100. They only record their small transaction fee (often just cents) as revenue. They are a “Service Provider.”

3. Amazon (Third Party): When third-party sellers make a sale on Amazon, Amazon does not recognise the full amount of the sale as revenue. Instead, they only record their net share plus commissions and fulfilment fees.

But when something’s delivered can mean different things for different people. In the book Financial Intelligence, the author asks what you would do in these situations:

- Your company does systems integration for large customers. A typical project requires six months to design and be approved by the customer, then another twelve months to implement. The customer gets no real value from the project until the whole thing is complete. When have you earned the revenue that the project generates?

- Your company sells to retailers. Using a practice known as bill-and-hold, you allow your customers to buy product (say, a popular Christmas item) well in advance of the time they will actually need it. You warehouse it for them and ship it out later. When have you earned the revenue?

- You work for an architectural firm. The firm provides clients with plans for buildings, deals with the local building authorities, and supervises the construction or reconstruction. All these services are included in the firm’s fee, which is generally figured as a percentage of construction costs. How do you determine when the firm has earned its revenue?

The first example I’m not too sure, the second I would say once the product is shipped, and the third I have direct experience in as I co-run a construction company and deal with architects all the time. They’ll take 90% of it up front and do f-ck all after that.

Relax, architects—i’m joking. I know you work in milestones.

2. Operating Expenses

Operating expenses are the costs the company incurs from making a product, delivering a service or running the company’s day-to-day operations. Some directly contribute to growing the business such as (COGS/COS), some keep it afloat (SG&A) and others look to bring work in or develop products (marketing, R&D). Take a look at some of the differences between the two companies.

Visa

Amazon

Both companies have different types of operating expenses because they’re two very different companies but, on most statements you’ll find the following:

Cost of Goods Sold / Cost of Services (COGS/COS)

Cost of Goods Sold or Cost of Services represent the direct costs to the company for producing a product or service—the materials, labour and delivery.

For companies that sell products like Amazon, it’s easier to attribute a cost to a physical product plus work out the inbound shipping costs. For companies like Visa, who offer a service, it’s harder to tie a specific cost to a specific unit of service.

Selling, General & Administrative (SG&A)

A catch-all for costs that fall outside of COGS/COS and don’t directly contribute to growing revenue but keep the lights on and the company ticking over. Think of things such as:

• Salaries

• Office rent

• Marketing

• Advertising

• Legal or HR fees

Depreciation & Amortisation (D&A)

This is a “non-cash” expense. Accountants spread tangible assets like equipment, vans and buildings, or intangible assets like software and patents out over their useful life for accounting purposes and record this on the income statement. If my company buys a van for £36,000, the accountant, if using a straight-line method of depreciation, might determine that the useful life of the van is 3 years and would allocate a £1,000 cost of the van per month to the income statement.

My company is not paying out £1,000 per month as the van was bought in a previous accounting period using cash, debt or a mix of both but, it’s still expensed and thus comes off the company’s gross profit.

Research & Development (R&D)

R&D is money a company is spending on researching and developing future products, services or processes. For Amazon, think Amazon Echo, Firestick, Prime, etc. Visa doesn’t explicitly have an R&D section, but does have a “Network and Processing” line which, if Visa is making improvements to their systems, you could argue this is R&D.

Total Operating Expenses

This represents the total costs of all operating expenses and is subtracted from revenue. You can see how Visa—a service provider, has significantly less operating costs than Amazon that has physical infrastructure and inventory.

If you have money left over after all costs are subtracted, well done—you’ve made an operating profit. But you still can’t get too excited yet. You’re closer to making a profit, but it’s no home run.

3. Operating Profit

Once all operating expenses are subtracted from revenue, you arrive at operating profit. Operating profit is a useful metric when assessing the health of a company because it gives you an indication of how profitable the company is before you start to add or deduct tax, interest, and other investment income. Things that don’t really have any bearing on how well the company is operating from the products or services it sells.

Visa

Amazon

4. Non-Operating Income

Companies can also make money from activities that do not directly contribute to their operations.

Visa

Amazon

Non-operating income can include:

Interest Income

• Interest earned from cash in a savings account

• Interest from government or corporate bonds the company holds

• Interest received from notes receivable or loans to third parties

Investment Income

• Dividends they receive from shares held in other companies

• Realised gains from selling physical assets such as property, plant, equipment

• Stock they sell (if they sold it for more than they bought it)

• Rental income from investment properties that may not be related to the primary business

They could also owe money.

Interest (Expense)

Interest expense is the cost of borrowing funds the company may have used to grow the business, make an acquisition or pay down bad debt (swapping high-interest debt for low).

Total Non-Operating Income

Total non-operating income is what the company earned from interest and investment income minus any interest paid (expensed). If it’s a plus, the number is added to operating profit, and if it’s negative, deducted.

5. Tax Provisions

When companies make profits, they have to pay taxes, and what the company’s liability for that tax will show up here before the bottom line—net profit.

Visa

Amazon

As these companies are global powerhouses you’ll have to do some digging as where they paid they tax if that’s you’re thing. Is it all in the states or is it spread over regions?

6. Net Profit/Income

Net Profit is the bottom line of the income statement. If you’ve made a profit it’s what’s distributable to shareholders of publicly listed companies, or the owners of private companies, after all costs, interest and investments, taxes, and any one-time charges are removed from revenue.

Visa

Amazon

Considering Amazon’s revenue was almost 16x Visa’s they’re not too far apart when it gets to the bottom line. Being the beast they are, Amazon needs to keep spending money on new warehouses, fleet and product development to keep growing. On the other hand, people are increasingly paying less with cash and more with their cards. Visa, and Mastercard own a duopoly in this space and have done for decades.

If you only understand those six sections, you’ll already be ahead of buckets of people when it comes to understanding the income statement. For those that want to analyse the statement in a little more depth, you can look at the following.

This article is from “The Nuts & Bolts” section where I provide business operators and investors the mechanisms and manuals to make better decisions. To continue viewing articles like this please consider upgrading to The School of Knowledge+.

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Margins, Percentages and Ratios

Gross Profit Margin

Gross profit is what’s left after Cost of Goods Sold (COGS) and Cost of Service (COS) is subtracted from Revenue. Gross Profit can also be expressed as a percentage to monitor profitability of a company’s products and services at a rudimentary level.

Visa’s revenue for September 2025 was $40 billion and its cost of sales was $7.9 billion. Therefore, its gross profit was $32.1 billion.

To see that as a percentage (or margin), just do the following calculation:

$32.1 / $40 = 0.8025

0.8025 x 100% = 80.25%

*I’ve rounded the numbers.

Operating Margin

Like gross profit margin, investors and business owners want to keep an eye on the operating margin of a business and understand why it’s moving in one direction or another. Is the corporate office bloated and dragging down margins? Is the company embroiled in a legal dispute with fees adding up? What about the other way—why has your operating margin jumped 10% this year? Maybe you’ve cut back on marketing or used internal employees instead of consultants who’ll likely charge higher fees.

Either way you need to ask: Is what you’re seeing sustainable or is it smoke and mirrors?

To get to this figure, the calculation is as follows:

$68.6 / $638 = 0.108

0.108 x 100% = 10.75%

Net Profit Margin

Net profit margin is expressed as a percentage once all operating costs, non-operating costs and tax provisions are subtracted from revenue. It tells you what the company earned as a percentage in relation to revenues. Low margins are vulnerable to sudden price changes or one-off charges. Think Trump and his tariff war the last 6 months.

$20 billion (net profit) / $40 billion (revenue) x 100%

$20 / $40 = 0.5

0.5 x 100% = 50%

Percentage Change of a Metric

If you want to track a metric change of a company, such as revenue to see if it’s improving or declining, use the following calculation:

Current year - prior year

/

prior year =

x 100%

Example:

If this year’s revenue is £550,000 and last year’s revenue was £500,000, the calculation would be as follows:

£550,000−£500,000 = £50,000

/

£500,000

= 0.1

0.1 x 100 = 10%

Earnings Per Share

Earnings per share (EPS) is a company’s net profit divided by the number of shares outstanding. EPS is a number that investors, particularly Wall Street keep an eye on. An EPS miss will almost certainly drag the stock price down but weirdly enough it rising can sometimes do the same. Who’d be an investor.

Final Thoughts

The income statement answers one question: Is this company profitable? A company showing a loss this year might have been profitable eight of the last ten years. Is it a good company or a bad company then? When analysing a company—you’re own included, you want to look for trends overtime. Has revenue grown at a healthy rate over the last 5-10 years? Has D&A rocketed suddenly (think AI/tech stocks)? If so, why? Why is this companies gross profit 15% higher/lower than it’s industry peers?

If you like solving puzzles or murder mystery games you might do well at investing. If you can smell bullshit a mile away, even better.

You should now, at least on a basic level, be able to answer that primary question, understand what each definition means, and how to get to net profit. Understanding the nuances though is just a little more difficult and will require reading many income statements form different companies and industries.

Here’s a quick checklist of everything we’ve gone through:

Before diving in, tick off these basics:

• Check the currency: pounds, dollars, euros?

• Check the scale: thousands, millions, or billions?

• Identify the reporting period: quarterly or annual?

• Note the accounting standard: GAAP, US GAAP, or IFRS?

Then work through the six key sections:

1. Revenue: the top line; what the company charged customers

2. Operating Expenses: COGS, SG&A, D&A, R&D

3. Operating Profit: revenue minus operating expenses

4. Non-Operating Income: interest, investments, and other gains/losses

5. Tax Provisions: what’s owed to the taxman

6. Net Profit: the bottom line; what’s left for shareholders

Key calculations:

Gross Profit Margin = (Revenue − COGS) ÷ Revenue × 100

Operating Margin = Operating Profit ÷ Revenue × 100

Net Profit Margin = Net Profit ÷ Revenue × 100

Percentage Change = (Current Year − Prior Year) ÷ Prior Year × 100

And, remember:

• Revenue isn’t profit

• Up isn’t always good; down isn’t always bad. Understand why it’s so.

• The same thing has multiple names (revenue = sales = top line = turnover)

• It’s more art than science.

Until next time, Karl (The School of Knowledge).

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This article is from “The Nuts & Bolts” Section where I provide business operators and investors the mechanisms and manuals to make better decisions. To continue viewing articles like this please consider upgrading to The School of Knowledge+.

Get 20% off forever

References:

1. Financial Intelligence by Karen Berman & Joe Knight

2. Amazon 10-K - Feb 2025

3. Visa 10-K - June 2025

Below are 19 more mental models, concepts and frameworks I use to help me make sense of the world and make informed decisions.

Skin in the Game

People should be held accountable for the decisions they make; reaping both the rewards of skill and bravery—and the punishments of their foolish actions.

Why it’s important to know: Too many people are better at explaining than doing, particularly concerning areas of influence. We have social media ‘influencers’ giving us wealth advice who are barely even old enough to go to the cinema and watch an 18; politicians sending our troops to war who haven’t so much as had a bout of fisticuffs in their 50 years of being; and middle management—who aren’t brave enough to risk their own career, reputation or capital, trying their damned hardest to make sure that the staff below them don’t get “too big for their boots” and challenge their mediocrity.

The Lindy Effect

A model predicting that non-perishable things (ideas, technologies) will continue to exist proportionally to their current lifespan. If a book (the Bible) has been around for over two thousand years, it will more than likely be around for another two thousand.

Why it’s important to know: Not every new trend deserves your attention and fixation. There is first-mover advantage for those that actively seek the next hot thing (YouTube education channels, Bitcoin, NFTs), but most fads are just a temporary distraction. If you’re undecided on what to read, you’d be better off reading the classics over new novel “best sellers”.

The Map is Not the Territory

A model recognising that representations of our world (maps, plans, models) are always simplifications that can differ from actual reality. A breaking news event might be condensed into a 12-word headline or a 3-minute video, whereas the days, weeks, months or years leading up to the event may have involved billions of small interactions to make it happen.

Why it’s important to know: The world is complex, so we need to find ways to make it less complex. This is why we love to read books on Richard Feynman or famous entrepreneurs: we want the insights without the complexity of having to have actually studied PhD physics or turned a bootstrap company into a trillion-dollar behemoth.

Thought Experiment Framework

A structured method for exploring hypothetical scenarios and their consequences without real-world implementation. The Stoics practised Premeditatio Malorum, where they imagined negative events for themselves and loved ones to prepare for that eventuality. Charlie Munger’s book, Poor Charlie’s Almanack, also has a chapter on a hypothetical thought experiment.

Why it’s important to know: It’s not living in la-la land to sometimes sit there and deliberately daydream about something that’s important to you. That could be an acquisition you’re mulling over, moving to a different country, or deciding if the person you’re with is somebody you can imagine spending the rest of your life with.

Via Negativa

A model centred on improving knowledge through subtraction rather than addition. The strategy involves determining what doesn’t work to help reveal what is.

Why it’s important to know: It’s easy to want to find a solution to your problem by adding something to it—even if you think it’s helping. The problem with adding things to existing problems or systems that aren’t already working is that it will take time for the information to trickle back to you. If you want to lose weight, a good starting place is to cut your calories before you spend thousands on memberships, gym attire and personal trainers.

The Principal-Agent Problem

People who have their own capital, reputation or expertise at risk are more likely to behave in a manner that is beneficial to their business—even at times when it’s detrimental to them personally. These are called principals. People who don’t risk reputation, the clothes on their back or financial distress are more likely to professionally behave in a manner that is to their single benefit. These are called agents.

Why it’s important to know: Not everybody in a business can be an owner, but they can behave like one. It’s easy for personnel to be unmotivated and uninspired by their work, so it’s up to the owners to actively keep those employees who act more in keeping with a principal and remove those acting more like an agent.

The Search-Inference Framework

The search-inference framework states that all thinking can be modelled into a two-step process of search and inference:

1. Search – Involves scanning through potential ideas or solutions when seeking a desired outcome (goal) to a question at hand. You search through options, drawing on past experiences, knowledge and available resources. These are the possible solutions to the original question in service of achieving the goal.

2. Inference – Once the potential options have been gathered, the inference step involves evaluating each option and looking for any evidence that will either help or hinder you in trying to achieve your goal. To do this, you could use simple reasoning such as pros and cons for each option, or predict potential outcomes and weigh these against your desired goal. The quality of your decision hinges on how well you search in the first instance.

Why it’s important to know: This systematic approach might sound like something you already do, but often we take shortcuts when making decisions and lean on our schemas and biases to ease the cognitive load. We don’t like doing all of the nitty-gritty thinking—hence our AI usage—but this skill is now more important than ever.

The Sunk Cost Fallacy

The Sunk Cost Fallacy refers to the irrational decision to continue investing time, money, or effort into something simply because you’ve already invested resources into it, even when it no longer makes sense to do so.

Why it’s important to know: People cling to past commitments because of a psychological bias to avoid admitting failure or loss, even though the rational course of action would be to cut their losses and move on. This could fall under Charlie Munger’s Inconsistency-Avoidance Tendency or Simple, Pain-Avoiding Psychological Denial Tendency.

Mean Reversion

Mean reversion is the idea that extreme swings tend to move back toward average over time. If something shoots way up, or drops way down, it’s likely to eventually return closer to its normal level.

Why it’s important to know: It helps you avoid overreacting to unusual events. A basketball player who scores 50 points one game will probably score closer to their average next game. A stock that crashes might recover. Understanding this prevents you from assuming extreme situations will continue forever and helps you make better predictions about what happens next.

Mean reversion is the moving back towards equilibrium.

Anti-Library

Umberto Eco was a writer with a personal library of over 30,000 books. When people visited his library, they typically fell into a class of people who were impressed by his collection and asked him, “How many of these books have you read?” But a small few understood that a library is a research tool.

Why it’s important to know: There is far more to be learned from the unread books on your bookshelf than the ones you have already read. Books cost £5–£25 and have people’s entire life workings in them. It’s about as low-cost, high-payoff as you can get.

Anti-Knowledge

Anti-knowledge is the concept of understanding that there is more to be gained from what you do not yet know than what you do. Black Swans are inherently unpredictable, but by acknowledging their existence you can position yourself to positively benefit from them through small stakes but high-payoff trial and error.

Why it’s important to know: The concept of anti-knowledge teaches us that there is more to be lost (and gained) from the things we do not know. It’s not a case of predicting Black Swans, but of ensuring that when they do come along, your harm is kept to a minimum. This is similar to the unknown unknown quadrant from The Rumsfeld Matrix concept, where not knowing that there is an IED on the other side of the door you’re trying to kick down can blow you into a thousand pieces.

Creative Destruction

Creative destruction is when new innovations destroy old industries and jobs while creating new, better ones to replace them. Netflix destroyed Blockbuster video stores but created new jobs in streaming technology and content production. Cars destroyed the horse-and-buggy industry but created the automobile industry.

Why it’s important to know: It explains how economies progress and why change can be both painful and necessary. Old jobs disappear, which hurts people in those industries, but new opportunities emerge that often make society better off overall. Understanding this helps you adapt to change rather than resist inevitable progress.

Competition Neglect

Competition neglect is when people underestimate how many other people are thinking the same way they are, leading them to ignore how much competition they’ll actually face.

Why it’s important to know: It helps explain why people enter overly crowded markets, apply for long-shot opportunities without backup plans, and overestimate their chances in competitive situations. Over 90% of startups fail. Recognising this helps you make more realistic plans by remembering: if something looks like a great opportunity to you, it probably looks that way to many others too.

Goodhart’s Law

Goodhart’s Law says that when a measure becomes a target, it stops being a good measure—because people start gaming the system instead of actually improving what matters. You move from publishing one essay a week to two. If nothing has changed other than your appetite to release more content, then something has to give, and quality often has the biggest target on its back.

Why it’s important to know: It explains why so many well-intentioned rules and metrics backfire. Test scores, performance reviews, social media likes—once you make any of these the goal, people find ways to boost the number without actually achieving the underlying purpose. It reminds us to focus on what truly matters, not just what’s being measured.

Inside vs Outside View

The Inside vs. Outside View is about how you make predictions and judgements. The inside view focuses on the unique details of your specific situation—your plan, resources and circumstances. The outside view looks at what typically happens in similar situations by using statistical data and historical patterns from comparable cases.

Why it’s important to know: The inside view makes you overly optimistic because you focus on what makes your situation special while ignoring base rates. Most people naturally default to the inside view (”our project is different”), which is why projects run over budget and startups fail at predictable rates. Using the outside view helps you make more accurate predictions by grounding your estimates in reality rather than hope.

Prisoner’s Dilemma

The prisoner’s dilemma is a situation where two people can either cooperate with each other or betray each other, and the best outcome for both happens when they cooperate—but each person is tempted to betray because it could give them an even better individual result.

The classic example: Two prisoners are questioned separately. If both stay silent (cooperate), they each get 1 year in jail. If both betray each other, they each get 3 years. But if one betrays while the other stays silent, the betrayer goes free while the silent one gets 5 years.

Why it’s important to know: It explains why people and countries sometimes don’t cooperate even when cooperation would benefit everyone—because the fear of being betrayed or the temptation of individual gain gets in the way. It applies to everything from business competition to climate change agreements.

Second Order Consequences

When making decisions, it’s important to consider the ripple effects that your decision could have in the future. If you decide to spend all of your money on a new car but fail to consider the consequences that having no savings could potentially have in the future, you’re asking to be blindsided when something unexpected happens.

Why it’s important to know: It’s not that you have to overanalyse every decision to death, but you should at least think about how your decision today could impact events tomorrow. In business, a failure to think about the second order consequences of your decisions is the equivalent of playing Russian roulette.

Intellectual Humility

The concept of recognising the limits of one’s knowledge and remaining open to new information. Our brains are hard drives, and we often muddle up previous versions of our stories with the last time we told or remembered them.

Why it’s important to know: If you think you’re the smartest person in the room—great, good for you—but sad is the person who thinks there’s not a single person they can learn something from. Everybody has something to learn from somebody: even if that’s how not to do something.

De Bono’s Six Thinking Hats Framework

Edward de Bono’s Six Thinking Hats is a practical decision-making and problem-solving framework that encourages parallel thinking by having participants adopt specific roles or “hats,” each representing a different thinking style or perspective:

1. White Hat: Neutral, factual thinking (data and information).

2. Red Hat: Emotional, intuitive thinking (gut feelings and emotions).

3. Black Hat: Critical thinking (risks and caution).

4. Yellow Hat: Optimistic thinking (benefits and positive outcomes).

5. Green Hat: Creative thinking (ideas and alternatives).

6. Blue Hat: Organisational thinking (managing the thinking process itself).

Why it’s important to know: Making decisions—especially with others—can be difficult. If you’re a creative person but the boardroom meeting you’re sat in is being dominated by a black hat who mostly looks for risk, you will be disheartened. This framework offers a logical sequence of events whereby most of the human psychology that comes into play when making decisions gets its chance to communicate.

Until next time, Karl (The School of Knowledge).

These last couple of weeks have allowed me to sit down and think without the self-imposed pressure of worrying about getting the next essay out.

In November 2024 I’d read Zen and the Art of Motorcycle Maintenance followed by Lila. Both books by Robert Pirsig have had a lasting impact on how I see and think about things. His concept of Quality is everywhere; from our justice and education systems; to our relationships with others and ourselves; to our work and craftsmanship. No other book, letter, conversation or other makes me think about writing great essays than those two books, and in keeping with the theme of Quality I want to introduce changes to The School of Knowledge starting today.

I’m raising the price of membership. And I want to explain why.

For the past year, I’ve tried to do too much. More essays, more frequency, more topics. The result? Work I’m proud of, but also work I know could be better. Pirsig’s books reminded me of something I’d forgotten: quality and quantity are in tension. You can optimise for one, but rarely both.

So I’m choosing Quality.

More time on research, more care in the writing, more useful tools you can actually implement. The kind of work that takes weeks to produce—because that’s what it deserves.

To do that sustainably, I need to charge what the work is worth. If you’ve been reading for a while, you already know what you’re getting. If you’re new, stick around—the free essays will show you whether this is for you.

What to expect

The homepage navigation bar has had a facelift and new “sections” (detailed below) added.

The Weekly: A short curation of links, lessons, and updates. Arrives every week. Always free.

The Lab: Essays on systems, mental models, and ways of thinking. The big ideas that sharpen how you see the world, or as Charlie Munger would call it—worldly wisdom.

The Case Library: Deep research on concepts, businesses and operators. The kind of analysis that takes weeks to produce.

The Toolkit: Templates, checklists, and prompts. Things you download and use, not just read. Once downloaded via the Toolkit page on the navigation bar these are yours forever to do what you want with.

The Nuts and Bolts: Operating manuals for business fundamentals. Accounting, SOPs, the unsexy stuff that not only keeps companies alive—but helps them thrive.

The Reading Room: Condensed insights from important books, shareholder letters and scientific research. The core ideas without the 400 pages.

On Quality: Essays on philosophy, craft, and the questions that don’t have easy answers. Inspired by Robert Pirsig’s Metaphysics of Quality.

Operator Interviews: Conversations with people building and running things. No influencers. Just practitioners. (Coming 2026)

What you already get for free

Before I ask for anything, let me be clear about what’s staying free—because it’s substantial.

The Weekly lands in your inbox every week with curated links, lessons, and updates. No paywall, no teaser content, no bait-and-switch. It’s genuinely useful, and it always will be.

You’ll also get selected essays from The Lab and On Quality—the philosophical and systems-thinking pieces that form the backbone of how I see the world. Some of my best writing lives here, and I want everyone to have access to it.

If that’s all you ever read, you’ll still come away sharper. I mean that.

But if you want to go deeper—into the research, the tools, and the implementation—that’s what membership is for.

The School of Knowledge+

Paid members unlock everything else—the research, the tools, and the implementation guides.

For just £15/month (or £120/year), you get:

The Case Library: Deep dives on how businesses and operators do the things they do.

The Toolkit: Calculators, templates, and checklists to stress-test your own thinking.

The Nuts and Bolts: Operating manuals for the fundamentals—accounting, systems, decision-making frameworks.

The Reading Room: Book syntheses that distil complex ideas into actionable insights.

Operator Interviews: Conversations with practitioners who’ve done it, not just written about it.

The 2026 Offer: 26 discounted annual memberships

To mark the new year and these changes, I’m offering 26 annual memberships at £96—a 20% discount for life.

Why 26? Because it’s 2026.

Once they’re gone, they’re gone. No extensions, no “we found a few more.” Twenty-six. That’s it.

If you’ve been thinking about joining, this is the moment. If you’re already a paid member, thank you—your price is already locked (more on that below).

Claim Your Lifetime Discount

For existing paid members

Your price is locked in. So long as you don’t unsubscribe and then resubscribe to a paid option, you won’t pay a penny more. You believed in this early, and I won’t forget that.

If anything ever changes on that front, reach out to me directly and I will ensure Substack refund you the difference. You have my word.

Why join The School of Knowledge+

1. Stop collecting ideas and start using them. Most business content gives you something to think about. This gives you something to do. Every framework comes with the tools to implement it—calculators, templates, checklists. You’ll finish reading and actually change how you operate.

2. Learn from people who’ve done it, not just studied it. Our interviews are with operators—people who’ve built companies, survived downturns, and made decisions with real money on the line. No influencers. No career academics. Just practitioners sharing what actually worked.

3. Get the research you don’t have time to do yourself. Running a business doesn’t leave much time for reading 400-page books or analysing case studies. We do that work for you and distil it into what matters. Consider it leverage on your learning.

4. Make better decisions under uncertainty. The diagnostic tools and frameworks aren’t theoretical—they’re the same systems I use to allocate capital and stress-test decisions in my own construction business. I have skin in this game. If these tools keep my ship afloat, they might help with yours.

5. Join 12,000+ business owners who value substance over noise. No fluff. No engagement bait. No “10 mindset hacks” nonsense. Just people who run things, invest in things, and want to get better at both. The kind of people you’d actually want to do business with. You’re probably already one of them.

6. Help build something independent. The School of Knowledge has no sponsors, no ads, and no venture capital. Paid members are what keep it running and shape what gets built next. You’re not just subscribing—you’re backing the work.

How to get The School of Knowledge+ for free

Professional development is a legitimate business expense, and at £15 a month should be an easy approval. If you’re your own boss, it’s a no-brainer. If you have a boss to answer to, download my “Expense Request” form below, fill it in, and send it over to your boss.

Expense Request Form

Still not sure yet?

Start free. Read a few issues. See if the way I think matches the way you want to think.

If it’s useful, stick around. If it’s not, no hard feelings.

Subscribe now

The goal is simple: I want to help you think more clearly and act more effectively. Everything else follows from that.

See you on the inside.

Until next time, Karl (The School of Knowledge).