By: Chris Tell at: http://capitalistexploits.at/ [5]
It was one of my first private equity deals ever. I was introduced to a group of guys, all sporting adequate qualifications, a good story (BTW, almost everyone has a good story if only in their own minds) and they were already backed by a well-known Angel. The market opportunity looked good, the team looked good, and some pretty smart guys where getting involved.
I had been introduced by a good friend, a guy I considered to be very honest. Turns out he was being taken for a ride. Everyone was being taken for a ride. His failure was, and still is, that he's always been extremely trusting.
My decision making was based on the information I'd been provided, as I was not particularly familiar with the industry. The only thing that stopped me from throwing down a decent chunk of change was a 9th hour opportunity that popped up, unexpectedly. Thank God!
Contrary to the opportunity my friend was pitching me, this last-minute entrant was well within my skill-set, and I immediately felt more comfortable with it as a result. In short, I knew I had good information on the deal because much of it was my own.
Looking back on it now, I was super lucky. Months later I met and spent some hours with the founder, and by this stage things were already falling apart in a hurry. The "investment" my friend got involved with turned out to be a complete shocker.
I've since met many people like this particular founder. He was a scumbag through and through. Working alongside a guy like that would have earned anyone a degree in aberrant psychology. The tell tale signs are now pretty evident to me, but when I was just 20-something they were not so obvious. Let's examine...
Decision making pretty much always comes down to the information you have at hand. The way I see it there are essentially 4 possible scenarios/outcomes:
- Good information -> Bad decision
- Bad information -> Bad decision
- Good information -> Good decision
- Bad information -> Good decision
Of the 4 examples above, the probability of 2 and 3 taking place, I believe, far outweighs the probability of 1 and 4 taking place.
One needs to be cognizant of all the pieces of information that are required to make an informed decision. You need a checklist, even if just in your head. Missing just one critical piece of the puzzle, even while you have the majority of the "pieces", can easily lead to disaster.
Let's take a real world example. Right now I'm looking at some real estate. My reason for looking at this real estate is because I found out that a private school is being built in a nearby area. Based on trends I've monitored for years this should be positive for land values in the area. How many expensive private schools do you know of which are surrounded by ghettos?
So, here I have information and I need to make a decision. My knowledge of the private school being built is just one piece of information. What about current land values? What about existing land restrictions? What about the local economy? What about the odds of success for the school itself? Is this a new company with untested methods? Has the school/company done their due diligence on ensuring demand for their product? There are a lot of questions to be answered before I decide to buy the land or not.
I'm just using this as an example. I'm sure you can come up with some from your own past experience.
In order to successfully wade through the ever increasing mountain of information flowing our way we have to find a way to synthesize that information rapidly, constantly and methodically. The best business owners do this effectively and efficiently. It is a skill which needs to be constantly developed, honed and refined.
Here then are some simple steps I think are important to improving decision making:
- Ensure reliable, quality information. It's extremely tough to make good decisions based on bad information. Being discerning about where you get your information from is important.
- Surround yourself with people better than you. Nobody is perfect, and a collective group of smart, critical thinkers will outdo little old you on your own... EVERY TIME. Seek the counsel of mentors and peers with expertise where you have little or none.
- Focus on the facts. Forget about opinions, forget about the "story". Focus on facts, as nothing else matters. Doing this will steer you away from hucksters, liars and scumbags. "Trust but verify" is fantastic advice.
- Question all assumptions. Don't be shy. If you're the one guy in the room who appears not to "get it", just keep focused and strive for the truth. I have a very funny story about this which I'll put into a post for another day. Suffice it to say that if something doesn't make sense to you, go with your gut.
- You're not stupid. The reason I put this in here is because I've had scumbags try convince me that I wasn't "smart" enough to understand the technology, but that didn't matter. Take something that you know little about, say astrophysics, artificial intelligence, cryptography, paleontology, whatever... A basic understanding of the subject matter, no matter how "complex" is really within the grasp of most anyone with an ability to read. Much of it is simple concepts masquerading as scary jargon. Trust yourself and allow yourself to understand before making any decisions. Spend as long as you need to.
- Pay attention to your Gut Instinct. What I said at the end of point 4 above... Gut instinct is something I wrote about before on this blog. After enough time on this planet, one's gut instinct becomes, I believe, a collective or intuitive deep knowledge source. Think of it like an experiential filter, with your brain synthesizing the billions of data points accumulated over your lifetime, and immediately answering an "equation." Ever wonder how you can meet someone and within seconds you absolutely know that they're a scumbag? This is it. Pay attention to it.
To wrap it up, all of the above are positive statements, but you want to observe a couple "don't" scenarios:
- Further to point 2 above, don't seek opinions and feedback from people ill equipped to provide you with valuable insight. You wouldn't ask your mechanic's opinion about eye surgery. Bad feedback is worse than no feedback.
- Absolutely do not look for input from people with a bias in the deal.
- Don't procrastinate. Inaction is an action itself. NOT making a decision is a decision. All the extremely successful people I know never shy away from taking action and making decisions.
I'll leave it there for now, but I'll revisit this topic again soon, as it has a lot of implications for your success as an investor, as a business person, and even in your personal relationships.
- Chris
"Whenever you see a successful business, someone once made a courageous decision." - Peter F. Drucker