Power Finding Tomorrow’s Giants in Today’s Markets
Most people who begin investing imagine that returns are evenly distributed. You pick a stock, it goes up 10%. You pick another, it goes down 5%. Over time, the hope is that your “winners” outweigh your “losers.”
But that’s not really how the market works.
In reality, investing—especially in innovation-led companies—follows a power law. A handful of companies generate the vast majority of wealth creation, while most barely move the needle. Think about Amazon, Apple, Microsoft, or Nvidia. If you’d owned them at the right time, those single positions would have outweighed hundreds of “average” investments. That’s the power law in action.
The challenge for us as investors is: how do you find the few that matter, and hold them long enough to let compounding work its magic?
Lessons from the Private Markets
In venture capital, investors live and die by the power law. Out of ten startups, one or two might succeed spectacularly, while the others fail or limp along. Venture investors don’t chase every business—they chase the systems that lead to exponential scaling:
- Products and services that solve high-friction problems (think payments, logistics, AI, clean energy).
- Communities of users who amplify growth (network effects, ecosystems, viral adoption).
- Business models with expanding gross margins and operational leverage (software, platforms, marketplaces).
This is why venture-backed winners like Google, Meta, or Tesla could grow so explosively in their early years. They had the DNA of power law companies.
From Private to Public: Catching the Next Wave
By the time these businesses hit the public markets (through IPO or direct listing), some of the “early venture-style returns” are gone—but the scaling story is often still in motion.
A company that has already conquered one market often moves to the next adjacency. Amazon started with books, then all retail, then cloud infrastructure, and now even healthcare and logistics. The same pattern repeats: dominant in one sphere, then leverage that dominance into the next.
So, as a public investor, the job is not to ask “Have I missed it?” but rather:
- What runway remains for exponential scaling?
- What new markets can this company credibly enter?
- Where are they on the business life cycle?
The BCG Matrix: Stars, Question Marks, Cash Cows, Dogs
Boston Consulting Group developed a simple but powerful framework to think about where businesses sit:
- Stars – High growth, high market share. They dominate a fast-growing market (think Nvidia in AI today).
- Question Marks – High growth, low market share. Lots of potential, but uncertain outcomes.
- Cash Cows – Low growth, high market share. Steady, profitable, often used to fund the next generation (Apple’s iPhone).
- Dogs – Low growth, low share. Capital traps.
Most investors spend their lives rotating between Cash Cows and Dogs—safe but stagnant. Power law investors focus on Stars, and sometimes on select Question Marks with strong probability of becoming Stars.
Horizon Three: Where I Place My Bets
In my investment framework, I segment my portfolio into three gears:
- Horizon One (Core Compounders): Steady, long-term winners (often Cash Cows).
- Horizon Two (Future Leaders): Companies scaling with visibility and profitability (Stars maturing).
- Horizon Three (Transformational Technology): The boldest bets—the potential next power law companies, sitting today as Stars or even Question Marks, but with gross margins, innovation, and communities that hint at exponential scale.
It’s in Horizon Three that the real asymmetric upside sits. These are the companies the market often dismisses as “too expensive” or “overhyped,” but that’s exactly the narrative you’d expect for companies with power law potential. They look expensive at first—until you see what they can become.
Why This Matters for Everyday Investors
If you’re early in your investing journey, here’s the big takeaway:
- Don’t aim for dozens of average returns. Aim to find the few outliers.
- Study how private companies scaled—what problems they solved, what communities they built.
- When they hit the public market, don’t dismiss them just because the stock has already “gone up.” If the business is still scaling into new markets, the power law effect is just getting started.
- Remember the BCG Matrix: focus your energy on Stars, not Dogs.
- And above all—invest with patience. The power law only works if you hold long enough to let compounding unfold.
Closing Thought
Power law investing isn’t about chasing fads. It’s about discipline—understanding systems, seeing exponential scaling early, and positioning capital where it has the potential to multiply over decades.
That’s why my Horizon Three portfolio exists: to capture the next generation of companies that will define the future, while the rest of the market is still debating whether they’re “too expensive.”
Because in the end, it only takes a handful of true power law winners to change the entire trajectory of your portfolio—and your financial future.
