dangletech

These are difficult times for investors.  Many decisions have to be made and doing nothing is not an option.  If you do nothing with your money, then you are not mitigating further risk to your portfolio and you are not taking advantage of opportunities.  You are simply letting the forces of the economic world have their way with you.  The value of the cash in your jeans will always go down because of inflation.  Thetwenty dollar bill in my pocket yesterday could buy me 25 litres of gas.  Today only 23.5 litres.  We need to develop ways for our money to grow and no; lottery tickets are not a sound investment strategy!

Where do we put our money then?  There’s the public markets - a place that has excellent opportunities if your timing is right.  I can remember the advice given to me by a friend and shrewd investor once:  “Nortel - no way it will go below $40/share - now’s the time to get in.”  Notwithstanding this experience, there are some good deals out there but you should always do your homework.  Fortunately, the public markets provide investors with a lot of information.  If you are interested in gathering information about a publicly traded company, the first place you should go is to http://www.sedar.com.  This is the System for Electronic Document Analysis and Retrieval developed by the Canadian Securities Administrators to provide the public with information that is required to be filed by public companies.  Company profiles, financial statements, information circulars and many other documents are there for you to review.

Information is not so readily available in the private equity markets so your digging will have to be more rigorous and time consuming.  The values of these companies though are not subject to the daily fluctuations of the public market. 

In either case, the investor must decide if they are primarily betting on the horse (the product/service) or the jockey (the management team).  It’s widely presumed that Nortel had excellent products but was brought down by inadequate management. People bet on the horse and lost.  Recent concerns about Apple CEO Steve Jobs health and its subsequent impact on the stock price, highlights the strategic risks of betting on the jockey.

Investors in new ventures have to focus on the opportunity and its market potential early in the funding decision process.  They are looking at the horse.  Does the product work?  Is there a market need and want for this product?  What is the size of the market for the product?  How is that market going to be tapped?  How long will it take this horse to make it to market?  Where’s the finish line and what’s the potential reward?  After those questions are answered satisfactorily and there is still investment interest, the emphasis switches to the entrepreneur and their team.  Time to look at the jockey. 

There’s an old proverb that states, “Businesses don’t fail, people do.” A business is merely an extension of the people running it and mirrors the abilities of those individuals. If the people running the business are strong in one area and weak in another, the business will reflect that. Potential investors need to ask a few questions, including: Does the management team have the full set of skills, abilities and experience to successfully lead the company to profitability?  Do they have a good advisory team?  Have they ever done anything like this before?  Are they goal oriented and persistent?  Do they have a vision?

Recent studies at Harvard present evidence that entrepreneurs with a track record of success are much more likely to succeed than first-timers.  These entrepreneurs have a knack for selecting the right industry and the right time.  This market-timing skill or even the perception of market timing skill (it could have been pure luck the first time) gives people the confidence to commit resources to the company.  Success breeds success.  The same study shows that even those who have tried and failed have a better chance for success than first time entrepreneurs.  Presumably they have learned from their mistakes. 

Back in high school, a friend of mine had a part-time job at Woodbine Racetrack.  He sometimes made money betting on the horses.  This road to riches I found quite fascinating.  “What’s the secret to successful gambling?” I asked him.  His response was as wise back then as it is today “Don’t bet more than you can afford to lose.” 

Manage your investment dollars with the same philosophy.  Know both the horse and the jockey before you place your bet.

About the Author

In 2002 Ross was a recipient of the Queen Elizabeth II Jubilee Medal for outstanding service through his efforts in numerous charities.