The richest person I have ever met is a gentleman named Richard...

The richest person I have ever met is a gentleman named Richard Koch.

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The Sunday Times (of London) Rich List 2018 states that Richard is joint number 312 in the list with a net worth of 410 million pounds ($775 million AUD). Richard is an investor and author and spends most days in the sun, switching between his homes in Cape Town and 'Iberia' (Gibraltar, Spain, Portugal) according to the season.When we met, it was a sunny day in Sydney, with Richard following the weather to the Southern hemisphere. Speaking with Richard shaped my investing philosophy and it was this moment that brought a powerful concept to my attention. Incredibly, Richard has achieved his wealth almost exclusively by investing in a) "star" businesses and b) businesses with strong network effects.Rarely it is true that there is a reliable way to get rich. But, following this approach is a dramatic way to improve your chances.

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The star principle is simple. Only invest in businesses that are in high growth niches / markets, and that are leaders in those markets. This concept is also known as the BCG growth-share matrix. For example, the online healthcare bookings market has incredible tailwinds behind it. This satisfies the first component, that the industry needs to be high growth. Secondly, the company you choose needs to be a leader in that industry. For example, 1ST has the highest market share when assessed by the number of sites. 1ST has ~10,000 sites, with HealthEngine and HotDoc each with around ~5,000 sites.

Network effect businesses are businesses that experience increasing returns the larger they become. These effects ensure that a company that gets to a certain level or size will find it easier to get to the next level. For example, the more sites that join the MyHealth1ST platform and offer online bookings, the more choice, and availability to consumers (the public). On the other hand, the more people who visit the platform and seek out online bookings, the more value to healthcare sites around the country who are members of the network.

Platform companies will often become exposed to network effects. Think of it as a simple 2-dimensional graph: the x-axis is the value of the service to the customer. The y-axis is the penetration into the market (i.e. the number of customers or suppliers using the service). If the line goes up and to the right, i.e. the value to each user increases, with ever greater numbers of users, than you have a network effect in operation. This podcast explains the power of network effects very well: http://investorfieldguide.com/gurley/

The heart of the power of network effects is that value increases exponentially — costs increase linearly. It is a staggering fact that seven of the ten most valuable companies in the world today are high-network-effect businesses. Every entrepreneur, every investor, and every employee should aim to invent, own a share of, or work in a new network business that is expanding extremely rapidly. The implication is a principle that anyone operating in an industry influenced by network effects should understand: in the long run, there will tend to be fewer players, and they will continue to grow larger. It is, for this reason, that network effect businesses can often trade at valuations that would otherwise seem astronomical, such as 20x revenue or more.

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Richard Koch followed these principles by investing in Betfair in the very earliest stages of its journey when it was valued at less than $20m. Betfair is an online gambling company that now operates the world's largest online betting exchange. At the time it was in a high growth industry, the market leader in the industry and importantly, it was a business exposed to network effects.... being a betting exchange not a traditional betting company.Richard said that at the time, Betfair was tiny and loss-making, but all he cared about was that it was in a fast-growing industry, the leader in the space and was exposed to network effects. He ended up with more than $100,000,000 from his original investment.

Today, for Richard, most days involve a few hours writing, playing tennis, cycling, hiking, walking the dog, gym, reading, and seeing friends for dinner. He told me that he will only do things that he is interested in, enjoys, and which may help other people.