The best question from this month’s Instagram Q&A was “How has being an entrepreneur changed your view about investing?” This week I answer this question based on my six-month experience as a solopreneur.
There is (always) a Reason
The market is efficient most of the time – finding a business that is attractively valued is very difficult and requires non-formulaic diligence – it’s always on a case-by-case basis. Similarly, when you notice there is no business that addresses the market you are trying to address – in this case, Investment Management and Equity Research – there is a reason (I know at least two businesses that tried to do similar things to what I do but are no longer active.)
Before I started building this coaching business, I did not understand why there are many at-scale Investment Banking coaching services, but very few that addresses the two industries I have had work experience in.
Today, with a deep understanding of the structural challenges associated with the industry itself (ie. a flat or declining industry) and how it wants to be served (ie. client needs are so fragmented with different required skills), I understand deeply.
As an investment management coach, I suspect that aspiring investors think there is a one-size-fits-all secret formula that can screen out actionable ideas out of a haystack. Maybe I am wrong – but a secret formula does NOT exist.
Some stocks are cheap for a reason; some stocks are expensive for a reason. The goal of investing is to find dislocation – the cheap that can become un-cheap, the expensive that can become un-expensive. Unless one digs into the situation, one will not know whether something is actionable.
Importance of Management
As an investor who emphasizes business quality, I already place enough emphasis on qualitative diligence. And the importance of good management cannot be overlooked.
In a publicly traded company, an investor is entrusting capital to hopefully able management who can allocate capital prudently to create value.
Speaking from personal experience with the amount of pivoting I have to do so far to achieve product market fit, I can relate to company management more than ever the difference between investing in companies and running companies – the devil is always in the detail. I cannot emphasize today how much long-term investing (maybe short-term too but I will never know or care) is a bet on company management.
Businesses are never just smooth sailing – there are competitions, mis-executions, regulatory changes and so on. Business ideas are really easy: everyone can dream about selling everything online and building electric vehicles, but only Bezos and Elon Musk accomplished it at scale. The importance of understanding management's incentives, character, track record and all the intangible qualities cannot be overstated.
Respect for Unit Economics
As I have discussed in my last article under the "Financial Modeling" section, I wished I paid more attention to unit economics earlier as an investor, a concept that is very common sense but rarely discussed explicitly in investing or finance literature. As a founder, I must focus on unit economics:
- how many coaching clients
- how much revenue per client
- how many sessions each client will consume
These three factors drive my revenue growth. My decisions on these three dimensions determine whether there is a viable business model that lets me be my own boss. This framework is the same for analyzing any public company - one must break down the basic unit economics (usually some form of price and quantity) to understand drivers of overall revenue and cost for the company.
I am a long-term investor and being a founder further reinforces that mindset.
I do not answer to anyone else for now. So, I am for damn sure not running the business in hopes of meeting quarterly consensus estimates (not that there are any).
Every strategic decision I make is to build the brand, even if there is no money coming in the short run. Today, I definitely can relate more to the customer-obsessed owner-operator (like Jeff Bezos, Steve Jobs, etc.) who focuses on building a business for long run.
Knowing What Matters
Every time I make a decision, the outcome is unknown but can break or make the business. So far I have made hundreds of decisions, and I have found only a few decisions have had material impact on the business.
That is very analogous to investing: every business has a few Key Performance Indicators (KPIs) that matter. Management knows that, and great investors know that. So I have a much clearer appreciation on how to allocate time prudently as an investor.
I'm going on vacation tomorrow. I will talk to you about how to read a 10K and stock idea generation in three weeks.