Starting a business or investing in one are two sides of the same coin.
The underlying nuts and bolts are identical. A major difference is the perspective.
For example, imagine that one of your friends—let’s call him Sam—comes to you with what sounds like a great business idea. So you’re considering whether to finance him.
While your focus is on the business’s start-up phase, you’re concerned with questions like:
• Does Sam’s concept make financial sense? Is it marketable?
• Can Sam create a compelling customer experience?
• Is Sam the kind of person who can inspire customers and employees?
• Can he build a team? Or is he likely to be a one-man band?
• And the other criteria we’ve identified that define a start-up that is likely to succeed.
Assume that Sam has all his ducks lined up in a row. But the financial requirements are a bit more than you can afford. So you decide to spread the risk by inviting others to put in some money.
All of a sudden, you’ve assumed the role of a stock promoter.
Your perspective has changed: to promote a stock successfully should you sell—
The Sizzle or the Steak?
A Vancouver stock promoter I met many years ago had noticed that some newly listed companies took off, while others with pretty much the same balance sheet and profit-and-loss statement stagnated or even fell.
By analyzing pairs of such companies, he discovered that what set one apart from the other was the story.
The company with the sexy sizzle caught the attention of the media, got brokers and investors hot under their collars and excited enough to open their wallets.
When he promoted companies like this—even when they had more story than substance—he could bank a handsome profit.
The boring, stodgy company that made bricks or industrial parts no one had ever heard of went nowhere. Even when it was the better investment.
Fact is, we all love stories. Fiction tops nonfiction on the bestseller lists—and bestselling nonfiction books are full of stories. TV is dominated by dramas and comedies. And when was the last time you went to the movies to watch a documentary?
The Big Short is the only recent one that comes to my mind. More “faction” than documentary, it has all the hallmarks of a classic drama. Ordinary and not-so-ordinary people skating on the edge of total failure as they confront, and eventually overcome, world-shaking events. While the supposed guardians of right and wrong are either asleep—or corrupt.
Turn to Forbes, Fortune, Businessweek, or your favorite investment adviser or Wall Street analyst and what will you find?
Stories.
We’re all suckers for a good story.
Marketers and salesmen take advantage of this, spinning an entertaining yarn that (at its best) is the truth, and nothing but the truth.
But rarely the whole truth.
How often, in your experience, did the steak you just bought fail to live up to its sizzle?
I hate to think. I was a callow youth of nineteen when I made my first investment. I bought the story—hook, line, and sinker. Turned out there was no steak. That, sad to say, wasn’t the last story I bought.
Did I say “investment”? I thought I was investing. In reality, I was speculating. And didn’t know the difference. Didn’t know there is a difference.
It took me a long time—and way too much money—to focus on the steak. Yet, I must admit, I’m still tempted by a great story.*
Cutting Through the Sizzle to the Steak
Buy the story and you’re speculating.
To be an investor, you must cut through the sizzle and only buy the steak.
In a start-up, it’s even more important to focus on the steak.
Buy a story on Wall Street and you can sell at any time.
There’s no market whatsoever for your interest in a start-up. So if the steak never materializes, your money will disappear.
And in a truly great business, the steak is better than the sizzle.
So let’s be realistic.
Cutting through the story to get to the nuts and bolts of the next Starbucks, Whole Foods, Walmart, or McDonald’s before its shares explode, or starting your own, takes time and effort.
But—as a friend who read an earlier draft told me:
“I Don’t Have the Time…”
“I don’t have the time to do all that traveling and walking around you’ve been talking about. I’d rather just pay you five thousand dollars to tell me when you’ve spotted the ‘next Starbucks.’”
Years ago when I was in the “investment-guru business” (as editor of the World Money Analyst), I might have taken him up on his offer.
But frankly, $5,000 is not enough. No, I’m not trying to raise his offer. I just want to point out that when you discover the next Starbucks, you’re sitting on a gold mine.
Back in the days of the California gold rush, do you think a prospector who came across a mother lode shouted his discovery from the rooftops?
Hell, no!
He kept his mouth shut, registered his claim, and (maybe) only then gloated about it.
That’s what you should do. Keep your mouth shut, buy as much as you can—and only then (maybe) talk about it.
• On Wall Street, what everybody knows is basically useless information. What nobody (else) knows is the yellow brick road to investment success.
Yes, finding what nobody else knows does take time. But quite possibly, less time than you might think.
Starting a business. The same principle, keep your mouth shut, applies when starting a business. The hard part is not the concept. It’s the execution.
Quite likely, some people out there are far better at executing than you are. (Certainly true in my case!) If any of them get wind of what you’re up to, they may get out of the gate before you can.
Much harder to achieve than keeping your purchase of a stock a secret. But not impossible. New ventures can even stay under the radar while in plain view. Which Walmart achieved by, fortuitously, opening for business in America’s boondocks.
Become a critical customer. You frequent a host of businesses pretty much every day. Whether in shopping centers or online. You’re always “walking around.” From now on, walk around with your eyes wide open. Evaluate your customer experience. You’ll soon discover how imperfect most businesses are.
When you come across a business with a superb customer experience, it will stand right out.
If your customer experience is the same the next time you buy from that business, and consistently good at the other branch(es) across town, you could be onto something.
In business, creative copycatting is a major key to success.
The process is the same: Walk around with your eyes open. Evaluate your customer experiences. With the aim of copying anything you find that will improve your customers’ experience—and your profits.
It worked for Sam Walton and Walmart. It will work for you, too.
Decode the company’s financial statements to see if they back up your estimate of the customer experience.
As we’ve seen with DavidsTea, a company can have loyal customers—without having (yet) enough customers to be profitable.
Or reverse the process. On Google or Yahoo! Finance you can screen stocks by EPS, return on capital, return on equity, or just about any other financial criterion you like.
When you find a company with outstanding financials, then check out the customer experience and other metrics we’ve been discussing to see if this business may qualify as the next Starbucks.
When You’ve Found a Great Company …
Then what?
Wait. You want more than a great company. You want a great investment.
A great investment is a great company at the right price.
The right price for a long-term, buy-and-pretty-much-forget investment is below intrinsic value, minus an extra margin of safety.
Which means you have to—
Be patient. Patience is the primary virtue of the successful investor. As George Soros put it: “When there’s nothing to do, do nothing.”
Too many people think that they’re not investing unless they’re buying and selling.
The truth is the opposite. More activity correlates with lower returns—partly due to higher transaction costs.1
Warren Buffett says he’s happy to come across a good investment idea once or twice a year. Placing one or two buy orders a year takes just minutes of his time.
You just need to look at the Forbes list of the world’s billionaires to see the result of such “masterly inactivity.”
Of course, the world’s greatest investors are not sitting around twiddling their thumbs in those many days, weeks, or months between their brief bouts of buying and selling.
On the contrary, the majority of their time is devoted to searching for investments that meet their criteria. The balance of their time is spent monitoring the investments they’ve already made.
Searching. The reality is, no one is going to find another Starbucks (or a hot copycat) every day of the week. Maybe not even once a year.
The times you can buy great companies at bargain prices are just as infrequent.
So the secret to profiting from the investment strategies we’ve outlined here is to identify great companies and figure out the price you are willing to pay so that when the time comes, you’ll be ready to act.
Indeed, when that time does come, you may have more investment candidates than you have capital to invest.
And After You’ve Bought the Next Starbucks … Monitor
This does not mean checking the stock price every day. Indeed, when an investment meets all our criteria, price is the last thing we need to worry about.
What’s far more important is to monitor whether the company is continuing to practice the five clues.
Any lapse—especially in the customer experience—is cause for concern; a possible time to sell.
What I’m Doing Right Now
As I write these words in early 2017, I’m sitting mostly in cash.
Collecting that magnificent 0.01 percent interest.
This is clearly not a strategy that will maintain the after-inflation purchasing power of my capital in the short term.
In other words, I’m waiting.
Waiting for the inevitable crash that always follows a boom. A rerun of 2008. When I expect to pick up dozens of truly great companies at fire-sale prices.
Am I suggesting you do the same?
Not necessarily.
You’re a different person from me.
That sounds like a statement so obvious that even mentioning it seems pointless.
But that is one of the most crucial things to understand if you want to be a successful investor.
You’re not me, I’m not you—and neither of us is Warren Buffett, George Soros, Benjamin Graham, Carl Icahn, Bernard Baruch, Peter Lynch, Peter Thiel, or any of the other members of the “investment hall of fame.”
We can learn from them. And should.
But if you’re familiar with those names, one thing is crystal clear when you think about it:
• No two of those investors have followed exactly the same investment strategy.
Each developed his own strategy to fit his unique personality, preferences, circumstances—and his particular skills, talents, and knowledge. As does every successful entrepreneur.
When you develop your own investment or business strategy, one unexpected result is peace of mind.
People who buy stories step onto an emotional roller coaster. They soar to euphoria and sink to panic as the market goes up and down.
When your investment or business approach is consonant with your personality, you are immune to Mr. Market’s manic-depressive perturbations. And with sound financial management, you can even be immune to the economic cycle of boom followed by bust.
It is said, and truly, that the best time to buy is when everyone around you is panicking.
Which is only possible if your mind is clear when everyone else is losing his or hers.
And, yes, it is possible to achieve wealth and fame by marrying it, inheriting it, stealing it—or otherwise riding on someone else’s coattails.
But nothing is more satisfying in life than discovering your own star and following it—to the exclusion of all others.