Investments should match your resources, temperament and skill. People become confused when they invest outside their personal borders. The circle of competence idea.
Part of the circle is knowing needs and matching resources. Each transaction has overhead so fewer are better. Be hard to distract. It takes a lot of small deals to reach the goal.
For many investors a simple improvement in technique is to explain to themselves why they think ABC Resources is a terrific deal. The conversation should include:
- The time it will take to mature if it is a trade or the expected dividend stream if it is an investment
- How you come to believe that story
- The range of possible outcomes. Risk. Could you afford the downside and how likely is that?
- How big a share of the solution is this deal?
- The depth of your analysis and what is possibly missing. Could be something you don’t even know about. Who else can help?
- The comparative investments within the industry and why this one is better than any other. How hard are they to compete against? Perhaps ABC cannot even survive when you look at the wealthy and skilled competitors.
- Balance sheet and operating statement ratios and why they are better than normal.
- Cash flow and cash flow requirements. If they need more money where will it come from? How reliably?
When presenting this kind of case, be sure to listen to yourself argue. You will be surprised how often something contrary will come up. Talking to yourself is the easiest and cheapest way to get expert advice, but you must listen.
Other than stay inside your circle of competence, remember to develop a circle of need and balance. Do not get distracted from doing the required. Investment size you be appropriate. Do not overdiversify.
Lions don’t hunt mice and Berkshire does not buy single store hamburger stands.
Sound investing is about efficiency. It always relates to your purpose and your ability.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772