Those of us who watch the hit TV show Shark Tank are very familiar with the panel of potential investors who consider offers from aspiring entrepreneurs seeking capital for their ideas. As investors, we are actually all “sharks” who make capital decisions on where to invest our money. Some investors hire wealth managers to make decisions for them and others prefer to make the decisions themselves. We believe the ultimate sharks are famed investors Warren Buffett and Charles Munger but the current panel of “sharks” are all well connected and great capital allocators. The sharks are never afraid of losing money as long as they believe the odds are tipped in their favor. We believe that thinking with the same mindset as the “sharks” will help you take some of the emotions out of these volatile markets.
We are all fortunate enough to live in country that offers some of the best investment opportunities in the world. However, some investors continuously monitor the markets for economic signs that might indirectly impact their investments. These questions usually apply to current events or headlines that capture readers attention. A few questions below seem to be the ones currently being debated.
- After the enormous relief rally, has the current correction ended?
- How low will the price of energy fall?
- How will falling energy prices impact the economy in 2015?
- Will the global contagion from the slowdown occurring in the rest of the world spillover into the US?
- Is it possible that Russia will default on its debt and will Putin lose power?
- Can the deflation/recession in Europe move to the US?
- If the Federal Reserve starts to raise rates at some point, will my investments lose value?
We can state with a large degree of confidence that very few investors can accurately predict the answers to these questions. However, most of the responses you hear will make for entertaining commentary on TV. As value investors, we think it’s best to have a mindset of a “shark”. The successful investors on the Shark Tank have an entirely different set of questions they try to answer before taking ownership in the business.
- How long will it take me to get my cash back and how much can this investment return?
- What is my potential downside risk in this investment?
- How much money can I possibly lose vs. the potential for upside?
- Do I understand how this investment works and what are the potential risks?
- Is this a scalable opportunity that can be leveraged?
- Are there high recurring capital expenditures to fund this investment?
- Can competitors easily replicate this idea and take market share?
- Will I be able to work with this management team/entrepreneur seeking capital?
We believe that the second set of questions is how you should be evaluating your investments. The first set of questions are all irrelevant to long-term investors who are properly diversified to their risk tolerances and goals. The second set of questions are much more relevant to making ongoing capital allocation decisions. If you think of yourself as a “shark”, your investment process will be much more decisive and your long-term investment results may improve.
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Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.