Thank you for all the great feedback this week. From your questions, I think it makes sense to step back and first answer the question: What Makes a Good Investor? Once we’ve got that under our belt, we can break the relevant skills into their component parts so we can measure and get better at them.
Good investing is hard because it requires three different types of people. You need to be creative to come up with ideas. You need to be a diligent researcher to vet them. And you need to be shrewd to turn ideas into money. Unfortunately, human beings usually come with one of these qualities at a time. For example, top-decile creatives aren’t often in the investment business. They are artists or in an asylum. Diligent researchers usually lack the creativity to spot opportunity or the business sense to capture the money for themselves. Bazaar merchants are good at churning inventory, but without a structural opportunity on which to apply their skills or a filter on what they are trading, they frequently run themselves into the ground. So you need to start by knowing, big picture, where your strengths are while tending to your weaknesses. Tending to your weaknesses means both working on the weak spots as well as surrounding yourself with people who excel in the categories in which you do not.
In my view, it is kind of obvious that you should envision investing as a supply chain of ideas, research and making money…and then organize people around that chain based on their skills. Folks don’t seem to talk about it this way and investment organizations aren’t structured around this reality, so I wanted to make sure I laid that out before we get into the details.
Now let’s try to figure out where your strengths and weaknesses are. Answer these three questions for yourself:
How many investment ideas do you come up with a month that merit researching?
When you research an investment, how many different people (non-investors) do you interview to evaluate the company?
How many things do you negotiate a day on average?
In broad strokes, these three questions help me figure out the relative strengths of the investor that I am talking with. To make this fun, we’ll make a numerical game out of it. Divide the answer to the first question by 100, the second question by 35 and the third question by 3. Add them up. If the number you get is 3. You are indeed God’s gift to investing. The rest of us have work to do. But now you know where to focus your attentions in terms of training and hiring in order to run a productive investment “supply chain”.
How did I get to those numbers? The numbers 100, 35 and 3 represent the extreme best creatives, researchers and traders that I have met in my life. Think about it. If you meet someone who negotiates, on average, three different purchases/things a day. That guy is a huge pain in the ass, so much so, that he barely exists in real life. But that guy, in a narrow way, is extremely good at extracting value out of a given situation for himself. Similarly, the person who comes up with three investment ideas a day is difficult to fathom. They are very productive, but scattered and often referred to by their colleagues as “crazy” or “has ADD”. If these extremes can live within you, one person, congratulations. The rest of us, however, need to be aware of these strengths and weaknesses, and plan our network and organizations around them.
The coming posts will mainly focus on measuring yourself and your behavior accurately so that you can tell what you are good at and what you are bad at. I hope this post provided you with a backdrop for what we are digging for and how it will all fit together.
