Some recent experiences have reinforced for me the importance of being an insider.
Not only is it important for fruitful investing, it is also key to a successful professional career.
For example, you are far more likely to get awarded contracts, or get offered an exciting job, if you are already known and respected by the client. Even in circumstances where a competitor may have a slightly stronger proposition.
If you are on the inside you are likely to be the first to be offered lucrative business opportunities.
The reason is that clients prefer to deal with people that they have previously had successful dealings with. They would rather continue doing business with someone who has demonstrated that they can successfully deliver.
This lowers the risks of the business relationship, lowers the transaction cost (the client doesn’t have to re-train a new provider), and increases the chances of a successful outcome.
It’s the same with investing. Great opportunities are likely to be offered to insiders before others.
Good insiders have previously demonstrated the value that they can bring to an investment (market knowledge, experience in growing investments, valuable contacts, etc).
As someone who’s got a unique set of experiences and expertise, what value do you bring to your investments to ensure that you get offered the best opportunities?
I’ve just finished reading Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score by Silicon Valley investor Andy Kessler.
It’s a fascinating read. It’s a diary, or sorts, of Kessler’s wild ride on the tech boom, turning $100 million into $1 billion from 1996 to 2001.
What was unique about Kessler’s fund is that it was 100% long. That is, the fund only bought stocks with the intention to hold them for the long term, and then selling them for a large profit.
Most other funds, however, will employ derivatives and various investing techniques that provide them with a hedge against various scenarios… hence the reason they are called hedge funds.
You see, Kessler had a unique vantage point by virtue of his professional background (a micro-chip designer and an investment analyst). He realised that there was a lot of money to be made in an industry about to explode. An industry that was about to change everything.
The real interesting part of the story, however, is that the fund sold up and paid out most of its investors just prior to the bursting of the dot-com bubble, based on the change in market sentiment that Kessler had become aware of.
Here we have an inside investor who very actively and deliberately changed their investment strategy based on a change in market circumstances.
Today, in perhaps the most disturbing and volatile market of our generation, the vast majority of investment advice out there is the same as it was prior to the GFC. That is, the old mantras, buy for the long term, and diversify.
Of all of the inside investors that you are following, how many are offering different advice today than they were 5 years ago?
The markets today are wildly different than they were 5 years ago. So anyone who’s still spouting the same mantra is either focussed on a secular trend (such as the current secular bull market in gold), or is clearly out of the loop with regards to the new investing realities that the GFC has initiated.
What are some of the broad strategies that the sharp inside investors are now advocating? It seems that liquidity is the paramount consideration, along with security of your assets and the preservation of your wealth.
Think about this as you make decisions about what you should do with your capital in the current market climate.
In a previous post I made the point about the need to follow inside investors who can influence your investment decision making process.
However, if you try to make investment decisions based on the say-so of one of these insiders you may very well be late to the game. Let me explain…
Of course, inside investors may make all sort of statements. But let’s focus on the types of statements that might lead you to make an investment decision (e.g. they issue a buy/sell recommendation for a stock, or offer some sort of market speculation backed up by data).
The problem with this is that the insider has already done their analysis and thinking regarding the investment, and in all likelihood have already decided on the play they will make (or will have already made). You, on the other hand, are only at the very beginning of the process.
This is not necessarily a bad position to be in. After all, this is one of the reasons you are following good inside investors… to learn about fruitful opportunities that you can investigate further.
But the real gem that many followers are missing is the influence part of this equation. That is, if you follow an insider long enough, some of their investing mindset will begin to rub off on you.
You may find yourself thinking like an insider, and may begin to form investment decisions prior to your favourite inside investor telling you their thoughts.
When this begins to happen, you know that your investment decisions are leading other investors, and hence you will be in a position to maximise your returns.
I’ve previously given you a few tips on how to narrow your investing focus and also given you a few ideas on how to determine what topics might suit your investment strategy.
To bring this all together, below are a series of questions that can help you discover your own inside track for investing, and hence bring out your very own unique investing mojo.
What do you know a lot about?
What expertise do you have? Can you use this as a starting point to learn about the investment possibilities in your field?
Perhaps it’s your profession, or your hobby. For me, I have expertise in the sciences, access to information about new scientific discoveries, and the skills to examine and understand the technical details of such discoveries.
Whilst new discoveries rarely present immediate investment opportunities, they can offer some insight into future technologies and social changes. So I use this expertise to both find and consider opportunities.
For example, in a scientific journal some years ago I read about an old food processing technology that had been reborn due to new equipment that could make the technology economically viable. This technology has the potential to vastly improve the quality of our processed foods, and at the same time increase their shelf lives and hence reduce food wastage.
It caught my attention. At the time I vowed that if a business closer to home ever sought investors then I would most definitely consider investing.
Approximately five years later, a local company did begin operations, and was looking for private equity to fund their national expansion. The management of the company checked out, the numbers made sense, and there were already a number of well-regarded high net-worth individuals on-board.
To this day this remains my favourite investment, and it is already turning a profit even though the company is still in its development phase and probably won’t see a meaningful return to shareholders for another couple of years.
What do you have a passion for?
What “wows” you? Is it new technology? Medical breakthroughs? Nice houses? Solving problems?
My particular passion is for what is known as ‘disruptive’ technologies, that is, new technologies or ways of doing things that can completely revolutionise society and business.
Examples from history include the production line in factories, fibre optics in communications, mortgage-backed securities in finance, and the list goes on.
So, I tend to look to invest in such potential ideas, but am very particular. I only consider companies that have a compelling business plan and strong management. The above example is one such operation.
Who do you know?
Do you know anyone who is well-connected and knows a lot of credible goss’ or has years of wisdom and experience?
You can learn things from these people about the way of the world. I’m not talking about your co-worker who bought shares in a company only to have them double ‘overnight’… purely by chance.
I’m talking about your partners’ boss who used to work for an investment bank, or your uncle who sits on lots of government committees, or your best friend’s nephew who’s part of a group of tech-heads creating successful start-ups.
These people are all doing things in the world, are privy to the latest developments and trends that you probably won’t read about in your local or national newspaper, and they have knowledge, information and experience that you can learn a lot from.
As a good example, I have a few close friends who work within state and national governments. From time-to-time I speak with them about various economic statements made in the mass media, and they are often able to explain the basis for those statements (e.g. “Europe is headed for a second great depression”) or point out hidden facts that cast serious doubt on the statements (e.g. “the housing market remains strong”).
Why do you want to invest?
Is it just because you think you should? Or do you have specific lifestyle goals that you want to achieve?
I’ve noticed that goals such as “I want to make a million dollars” are not compelling reasons to invest. Such statements are not specific (other than the dollar amount), and almost always carry no emotional attachment to them.
However, if you want to live in a house in a particular neighbourhood, or start-up a charity, or own a collection of vintage cars, and you need a million dollars to do any one of these things, then you have a goal and a dollar figure to go with it – you have a specific reason to invest.
This helps keep you focussed and also keeps your personal radar looking for the types of investments that will help you get there.
Notice how I did not ask you if you have a good education, and can you do math and english. Despite the fact that I have an advanced university degree, that included some highly sophisticated mathematics, I found that it has taken me quite a long time to be able to understand financial numbers (such as profit and loss statements).
What is the most important thing, at all stages of your investment process, is a clear understanding of the unique principles that you will use to guide you. The point here is that even if you lose everything that you put into in an investment, you need to know that you still made the right choices for you, and that you will not be bitter about having made the decision – an attitude that is essential to being able to continue to invest in the right types of opportunities.
When I was younger my father often told me that each person is good at something.
This is not to say that you are necessary perfectly matched to your current job or profession, rather that there is almost certainly something that you pursue with passion because you are genuinely and deeply interested in it.
For example, a classmate at university had a passion (and amazing talent) for remembering scores from every over of every world cup cricket match for the past 20 years. I don’t know how this might help him with his investing, but the point is that he’s an unrecognised expert in something.
Other people have day-jobs or businesses that give them useful skills or insights. A business colleague spent a number of years running a successful bathroom renovation business. Whilst it wasn’t a particular passion of his, he used his profession to learn about real estate investing, and his technical abilities later enabled him to add significant value (and hence income potential) to his own investment property purchases.
Myself, my background is in the sciences, and I have always been particularly interested in game-changing technologies, and my day-job sees me learning and interacting with researchers and innovators in all manner of new technological advancements. This has led my own investment strategy to pay particular attention to disruptive technologies.
One of the keys to finding awesome investments is to use your own expertise, whether it be professional or purely interest driven, to help propel your search for great investments.
By using your expertise as a key plank of your investing strategy you will be gifted with the drive, energy or essential skills and knowledge for discovering and analysing technical detailed information about prospective investment opportunities.
Quite often, the idea of an exciting new business can cloud the technical realities of whether or not it is likely or possible to succeed. This includes technological/operational issues as well as management and finance matters.
If your expertise enables you to cut through and understand the operational issues then you are already well ahead of most investors (including most of the so-called professionals on Wall Street).
When you absorb the information and knowledge provided by a good inside investor you will be able to augment this with your own expertise, and be able to put it into the context of the market at the time, and hence be in a significantly better position than if you had relied simply on a buy-sell recommendation from an investment firm.
The art of finding investments is like any other endeavour… becoming successful requires a certain level of education.
There are several types of education you will need. These can be broadly summarised as process, detail, and context.
The first, and easiest to acquire, is the process knowledge you will need regarding “how to” invest.
This includes matters as basic as how to buy a share on the stockmarket, and the far more complex matters surrounding tax implications and optimisation.
Of course, the more often you invest, the more experience and knowledge you will gain in these matters.
I won’t expand further on process knowledge at this stage, as there is already plenty of information readily available to you, from free content on the internet, to investor education courses, to professional advice, etc.
What I mean by detail education is the ability to analyse specific investments, or sectors, for their investment potential. This includes the ability to read and understand product disclosure statements (PDS), annual reports, forward projections, management track records, etc.
You may already have key inside knowledge regarding the types of investments you are keen to explore, or may have some close friends and colleagues who have such information.
Regardless, this information can often be obtained from inside investors. Depending on the information and type of service they provide, they may go into all of this analysis for you, and provide you with insightful summaries of otherwise long and complex documents.
Inside investors also do much of the hard work in sifting through the hundreds and thousands of investment opportunities in their field of expertise.
However, knowing and understanding all of the detail is irrelevant without an appreciation for the context of the market. The best inside investors also considers these broader perspectives.
As a good example of this, inside investor legend Richard Russell is now actively discouraging his followers from investing in any shares, simply because of his deep understanding of the stockmarket and the problems it faces at the moment. A summary of his message can be found on King World News, titled “Why Unemployment Will Rise Above 25% (4 January 2012)”.
I don’t believe it’s necessary to absolutely follow this type of advice. But it is essential to gather this contextual knowledge and perspective — from people with wisdom and experience — to ensure that you’re not throwing your money away on a great investment in the wrong market, when you could be keeping your powder dry for a day when the market is ready to embrace your investment.
This type of insightful contextual knowledge is usually very difficult to find amongst our own friends and co-workers, as the people who tend to be able to put this information together are out-of-reach for most of us.
For this reason alone, tapping into the right inside investors via the internet will often make the difference between average investment decisions and hugely profitable standout investments.