Day 941 — The Rarest Thing in Any Market
Lab Notes: On Stars, Cash Cows, and why the framework you use to buy shares might be missing a dimension
A note before we begin: this is a Lab Notes edition, usually reserved for paid subscribers. I’m opening it up to everyone today. I hope you find it worth your time.
There is a question that serious investors ask before deploying capital into any asset. It has many formulations, but they all reduce to the same thing: Is this a wonderful business?
Warren Buffett refined the question over decades. Charlie Munger sharpened it. Phil Town operationalised it into five numbers you could actually calculate on a spreadsheet. The framework is powerful, proven, and genuinely useful — whether you’re buying shares in a listed company or considering something closer to home.
But there’s a dimension it doesn’t fully capture. And a British entrepreneur and author named Richard Koch spent a career trying to name it.
The 2x2 That Changes Everything
In the 1970s, the Boston Consulting Group developed a portfolio matrix that, at the time, was a genuine intellectual breakthrough. BCG’s insight was simple: not all businesses deserve the same treatment, and the way to think about them is along two axes.
The first axis is relative market share — not your absolute size, but your size relative to your largest competitor. Are you the dominant player in your market, or are you fighting for scraps?
The second axis is market growth rate — is the overall market expanding quickly, or is it mature and slow?
Plot these two dimensions and you get four quadrants:
A Star is a business with high relative market share in a high-growth market. It is, as Koch argues in The Star Principle, the rarest and most valuable thing in any market. It has wind in its sails, and it’s already winning.
A Cash Cow has high relative market share but operates in a slow-growth or mature market. It prints money reliably. It just isn’t going anywhere fast.
A Question Mark (sometimes called a Problem Child) has a low relative market share in a high-growth market. It might become a Star with enough investment, or it might not. It’s a bet.
A Dog has low relative market share in a slow or declining market. It is, with occasional exceptions, a trap.
Koch’s contribution, his sharpening of the original BCG thinking, was to make a bold, arguably extreme claim: You should only ever start or buy a Star. Not a Cash Cow. Not a Question Mark. Certainly not a Dog. Only a Star. The mathematics of compounding in a high-growth, market-dominant business are so favourable, he argues, that everything else is a distraction by comparison.
It’s a compelling argument. It’s also not quite the whole story. We’ll come back to that.
What a Star Actually Looks Like
Before we can evaluate Koch’s claim, we need to understand what a Star looks like in practice. The definition is deceptively simple. The attributes are harder to find.
Genuine market dominance. A Star isn’t just a successful business; it’s the leading business in its niche. This doesn’t require a globally recognised brand. A Star can be the dominant supplier of a specialist industrial component to a narrow industry, or the clear market leader in residential property management in a mid-sized regional city. What matters is that the leadership position is real, measurable, and recognised by customers. When people in that market need what you do, they think of you first.
A market that is actually growing. This is the dimension most buyers ignore. A dominant business in a shrinking market is a Cash Cow — sometimes a very good one, but one with a structural ceiling. A Star’s market is expanding underneath it. That expansion does something powerful: it makes the business’s job easier. New customers are being created by the growth of the market itself. The Star captures a disproportionate share of them because it’s already the trusted leader.
A defensible position. Koch’s Star isn’t just temporarily ahead; it has something that makes staying ahead easier than catching up. This is where the framework converges directly with Buffett and Munger’s concept of the economic moat. The moat might be brand trust, switching costs, proprietary data, network effects, regulatory advantage, or simply scale that competitors can’t match. Without defensibility, dominance is temporary.
It helps to have a concrete example. Consider ZEISS SMT — the semiconductor division of the German optics company Carl Zeiss, privately held and headquartered in Baden-Württemberg. ZEISS makes the mirrors at the heart of EUV lithography machines — the technology used to manufacture the world’s most advanced chips, including the AI chips powering the current revolution. Conventional glass simply absorbs EUV light, which operates at a wavelength of 13.5 nanometers. ZEISS makes the only mirrors in the world capable of reflecting it. Scaled up to the size of Germany, the largest imperfection on one of those mirrors would be a tenth of a millimetre. They are, by any measure, the most precise mirrors ever made, protected by more than 2,000 patents accumulated over thirty years of development.
The EUV light bounces off ZEISS mirrors roughly forty times before reaching the silicon wafer. Every advanced chip, every Nvidia GPU, every Apple processor, passes through ZEISS optics on its way into existence. ASML, the Dutch company that builds 100% of the world’s EUV lithography machines, has sourced its optics exclusively from ZEISS since the late 1980s. Nikon spent nearly twenty years attempting to develop a competing EUV system before abandoning the effort entirely.
That is a Star. Dominant position. Growing market. A moat measured not in brand loyalty or switching costs but in thirty years of irreplaceable accumulated knowledge. The kind of competitive advantage that doesn’t erode — it deepens.
Improving economics over time. This is the payoff. A genuine Star tends to get more profitable as it scales, not less. Fixed costs spread across a larger revenue base. Brand equity compounds. The cost of acquiring customers falls as reputation does the work. In Koch’s telling, a Star that retains its position through a full market cycle tends to become extraordinarily valuable — because by the time the market matures and it becomes a Cash Cow, it’s an enormous Cash Cow, with margins and customer loyalty that competitors have long since given up trying to replicate.
Where Buffett Meets Koch
Here is where the frameworks become more interesting in combination than either is alone.
Buffett and Munger ask: is this a wonderful business with a durable competitive advantage, run by honest and capable people, available at a fair price? The framework is fundamentally about quality and value. It asks whether the business is good and whether you’re paying fairly for it.
Phil Town’s Big Five Numbers, Return on Investment Capital, Equity Growth Rate, EPS Growth Rate, Sales Growth Rate, and Free Cash Flow Growth Rate, operationalise the “wonderful” test. If a business has been compounding all five metrics consistently for ten years, something structural is working in its favour.
Koch asks a different, adjacent question: is this business in a position where the future is likely to be better than the present? His framework is fundamentally about trajectory and position. It asks not just whether the business is good, but whether the conditions for continued compounding are in place.
The synthesis — the thing neither framework says explicitly but both point toward — is this: a truly great investment is one where quality, value, and trajectory align. A wonderful business at a fair price in a growing market where it is the dominant player. That is the rarest thing in any market. That is a Star that Buffett would also buy.
In practice, these three conditions rarely align perfectly. But the framework gives you a way to trade them off consciously rather than by accident.
A Buffett/Town quality business in a mature market? That’s a Cash Cow. You might still buy it — at the right price, Cash Cows are excellent investments — but you should price it accordingly. You’re buying yield and stability, not trajectory. Don’t pay a Star’s premium for a Cash Cow’s future.
A high-growth market with a dominant player but mediocre underlying economics? That’s a growth trap. Koch would call it a Star on the surface; Munger would look at the return on capital and walk away. The frameworks check each other.
A business with wonderful economics, honest management, and a moat — but in a market that is actively shrinking? That’s See’s Candies. Buffett bought it and has described it as one of the great lessons of his career — not because it was a Star, but because it was a perfect Cash Cow available at a reasonable price. He wasn’t paying for growth. He was paying for the certainty of the cash flows. The lesson isn’t that Koch is wrong. It’s that a Cash Cow, correctly identified and correctly priced, is a legitimate and often excellent investment.
What the integrated framework rules out is paying a Star’s price for a Dog. And that, it turns out, is what most unsophisticated buyers do most of the time.
The Honest Difficulty
Koch’s framework has a challenge that he is refreshingly candid about: Stars are rare, and they are rarely for sale.
A business owner who has built a genuinely dominant position in a genuinely growing market is usually not selling. They’re compounding. The businesses that appear on broker listings tend, for structural reasons, to skew toward Cash Cows and Dogs — businesses whose owners are tired, retiring, or have hit a ceiling they can’t see past. Occasionally a Question Mark appears, priced on hope. Occasionally, very occasionally, something that looks like a Star surfaces — usually because the owner has personal reasons to exit that have nothing to do with the business’s prospects.
This doesn’t make the framework useless in a broker context. It makes it more valuable, because it sharpens the question you’re asking. You’re not running through a due diligence checklist. You’re asking: where does this business sit on the matrix, and am I being offered it at a price that reflects that position honestly?
A Cash Cow at a Cash Cow’s price can be a very good investment. Especially if you can see a path, operational, strategic, or market-driven, that the current owner has missed.
— Olaf
Before you go: one practical tip
Nobody (probably) taught you that your tools have a maintenance lifecycle. That’s not your fault. It’s just a gap.
The tool you own and the tool you maintain are two different tools.
Here’s the one that affects almost every household in the country, costs nothing to fix, and will make you feel slightly embarrassed once you know it: your kitchen knives are almost certainly blunt, and have been for years.
Not blunt like “a bit dull.” Blunt like a butter knife. The kind of blunt where you’re applying pressure rather than letting the edge do the work, where tomatoes collapse before they’re cut, where you’ve quietly concluded that you’re just not much of a cook. You’re not a bad cook. You have a bad edge.
A decent whetstone costs $30–$50 at any hardware store. There are two sides: coarse for restoring a damaged or very dull edge, fine for finishing. You hold the blade at roughly 15–20 degrees to the stone (closer to flat than you’d expect), and you draw it across in smooth strokes, alternating sides. Ten minutes of YouTube, ten minutes of practice, and you will have a knife that frightens you slightly with how well it works. That’s the correct outcome.
The thing that strikes me about this, and why it belongs in a newsletter about navigating an AI-disrupted world, is the invisibility of bluntness. You don’t notice the degradation because it’s gradual. You slowly adapt your behaviour to the limitation until it feels normal. You push harder. You saw instead of slice. You blame the tomato.
The lawnmower blade is the same story, scaled up. A blunt mower doesn’t cut grass — it tears it. Torn grass goes yellow-brown at the tips, becomes stressed, and is more susceptible to disease. Most New Zealanders with a lawn have been tearing their grass for years and attributing the results to soil quality, weather, or bad luck. The fix is to remove the blade once a season (socket set, 10 minutes), run a metal file along the cutting edge, and reinstall it. That’s it. The lawn responds within a fortnight.
The principle, once you see it, is everywhere: the tool you own and the tool you maintain are two different tools. Most of us own the first kind and wonder why the results are mediocre.
I’m not suggesting you become a sharpening obsessive — though apparently that rabbit hole is very deep and has its own Reddit communities. I’m suggesting that the next time something isn’t working as well as it should, the question worth asking first is: when did I last maintain this?
It’s a question that turns out to apply well beyond the kitchen drawer. And, you’ll save a heap of cash, not paying someone else to maintain your tools.
Nothing in this article constitutes financial or investment advice. Richard Koch’s Star Principle framework is discussed for educational purposes. As always, do your own thinking.