Aug 26, 2018

My bad bets on a junkie, a drunk, a serial liar and a fraudster

A new book — Big Mistakes by Michael Batnick — has inspired me to reflect on the worst unforced business errors I’ve made over the past few decades. I do this self-examination every so often to see if I can learn from my failings. Inevitably, the list grows longer. After such reflection I can be tempted to lose my confidence and retire from the fray. But I suspect that would be the worst mistake of all.

First and foremost, if I don’t bother to do the proper homework before backing a company, the venture is much more likely to go wrong. Thorough due diligence is boring but necessary when deploying capital. I need partners who are less excitable than I am and more likely to check for weaknesses, threats, and discrepancies in any plan and projections. I can get carried away with opportunities — and then live to regret my impetuosity. I suspect many of the most stupid investing decisions of my career were made because I had not carried out rigorous research before committing.

Another common blunder of mine is to become emotionally involved in a business or industry. For example, I’ve lost money in bookshops, film production and Italy because I liked them too much — I was blinded to the fact that each was a bad bet. Business should be a romantic adventure, but it must also be hard headed.

I worry about the fashionable obsession of entrepreneurs being “passionate” about their companies. I see many founders in, say, the restaurant or travel business fall in love with the industry — and go broke because they forget about basics such as margins and cash. Entrepreneurs should be committed, tenacious — even obsessive. But commercial success comes to those who are unsentimental and pragmatic, not to those who get carried away.

Probably the most common and devastating mistake I’ve made is to choose the wrong business partners. I used to think I was a reasonably good judge of character; now I’m not so sure. I am ashamed to admit that I have unknowingly backed a drug addict, a drunk, a serial liar, a fraudster and assorted other ne’er-do-wells. In each case the venture ended badly.

I’m sad to say there are quite a few rogues and duds out there — I have the financial scars to prove it. After several such experiences, one can end up with a cynical view of entrepreneurs, but then you strike gold with a brilliant partner who redeems your faith in humanity. I have learnt that you should trust your instincts when selecting partners — and that there can be no compromise where honesty is concerned.

Understanding your limitations is important if you want to make money. I have a few areas of domain knowledge and I’ve tended to focus most of my cash and energy on those. At heart I am a fairly specialist, concentrated investor. When I stray outside my sphere of competence, it usually results in losses.

Sometimes I meet fund managers who are gifted generalists, who can make wise decisions about many dozens of companies active across lots of industries. I admire their skill, but I cannot replicate their modus operandi.

I have tended not to use high levels of debt in most of my undertakings. Those who do borrow heavily will frequently blow up because small problems are amplified by leverage. Many concerns cannot withstand both debt and a downturn — and they always come in the end. Naturally, leverage enormously boosts returns when times are good, while profits and multiples are growing.

You only need to take a few such gambles to land on the Rich List. Hence a big mistake of mine has been over-caution: not gearing up during bull markets and taking advantage of rising prices.

Hubris is a common affliction of anyone who has enjoyed a modicum of achievement. Most of us think we know more than we do — about markets, competitors, customers and so forth. If you’ve made some money then you tend to take bigger risks. I know I am more impulsive if I feel I’m underinvested. Having cash swilling around in your bank account is a dangerous condition. I’ve met plenty of clever entrepreneurs who’ve sold out and then immediately plunged into a foolhardy venture simply through boredom and impatience.

The savviest investors are humble and thoughtful. They play the long game, work hard and know their strengths, and their flaws. All of which is easier written than done.