Successful Investment

Every successful investment is conceived through decisions that were harder than they appear to an individual appraising that decision from afar. There are very rarely any exceptions to this rule. Investors typically have a heavy focus on so-called no-brainers, obvious wins, and simple yet high levels of ROI. Those overused sayings, especially the ”no-brainer” tag should be confined to a white paper on how to rapidly delude oneself.

A crucial component of investment is defining what looks straightforward in hindsight from what seems straightforward right now. After all, they are different animals. Quite the opposite one might say.

This is not just hindsight bias, a close relative of confirmation bias, where everything in historical terms naturally appears obvious. It surrounds a progressive view aligning with the risk-reward ratio, which of course is extremely difficult to establish – it actually manifests in questioning ourselves with a theme of  “What am I actually doing?” before making any investment decision. Straightforward decisions are not commonly viewed as “no-brainers” in hindsight, and vice versa.

As Warren Buffett would say, be fearful when others are greedy and be greedy when others are fearful. That is so easy, again with hindsight in mind.

Sourcing the most successful investments requires either being more engaged in finding opportunities than other investors, or having a more confident approach to risk and potential downsides. It’s rather prevalent to be the former. Many people spend plenty of time seeking suitable investment opportunities because it’s natural to want to increase our wealth, however, the more pertinent characteristic is one’s risk appetite. Generally, investing only time is easier than actually making the final decision to commit capital.

We could use Dragons Den as an example. A panel of professional investors who spend plenty of time sat in front of budding entrepreneurs seeking inward investment. The conversion rate for each Dragon from time to commitment is rather low. The Dragons that historically have a higher conversion rate to commit to investment, are the Dragons that clearly have a higher risk appetite. With hindsight applied we can consider a hypothetical scenario to see how we view the ‘now’ vs the ‘then’.

Take AirBNB. Now it looks like such an obvious concept and why did someone not think of it before 2008? We can but imagine how a Dragon’s Den pitch may have gone on that one:

Peter Jones: Let me try and understand you Brian. You think people will stay in a property of a total stranger they have not visited first, without the safety of booking with an established hotel?

Brian Chesky: Yes.

Deborah Meaden: So you are saying that you will try and take a large market share from the hospitality industry in regards to hotels and tailor made accommodation, be them Hilton, or Marriott, or Wyndham, via an online platform?

Brian Chesky: Yes. And we will also remove the need for landlords – the operator of the accommodation – and tenants to speak as they can use our fully automated system. The landlord does not actually need to even meet their tenants/guests as they can leave access keys in lock boxes for check in and check out.

Duncan Bannatyne: What do you think your valuation can be longer term?

Brian Chesky: We believe the company, post flotation, to be worth over $100 billion in the next decade or so!

Brian would have been laughed out of the Dragon Den building of course.

Or take Elon Musk’s investments in the likes of Tesla and SpaceX and the level of commitment made from the proceeds of PayPal’s sale. A commitment to compete in evolutionary products that would challenge corporate juggernauts such as, Ford, General Motors, Toyota, or, to supply hardware to a space-faring agency that would cost billions to even get near offering supply for consideration. Now in hindsight, that level of time and financial commitment seems rather savvy. Tying this back into the analogies of Mr.Buffett, we would be living in a dream world if we believe being greedy when others are fearful is as easy without a revolutionary view, or a very, very large risk appetite.

The critical conclusion is that risk is required for a substantial reward, but the risk cannot be quantified into data points, market conditions and emotional decision making. It is also measured by the acceptance of the unknown, and a determination to make affirmative decisions that most other people would not make, specifically because the difference between your financial commitment and general consensus is where outperformance resides.

One of the military personnel from the Osama Bin Laden raid published a book about his career in the Navy SEALs. A very wide range of skills at an extremely high level is crucial to reach the required standard to become a SEAL. He stated in his book, “one of the key requirements to become a SEAL was the ease to be comfortable being uncomfortable.”

It’s no different in any successful investment.

Iain Crawford