“The world has changed.”
The phrase uttered by Warren Buffett still impacts me to this day. Life after the Great Lockdown is different.
I sense a change in my personal self as well.
I was confined to the very spaces of my rented room, far away from home. Even so, I have learnt to cope with life during the Circuit Breaker in Singapore. Investing and self-learning was my favourite pastime.
Luckily there are plenty of informational YouTube channels that I picked up. In my last article, I mentioned that I watched Shark Tank on YouTube. How the Sharks analyze investment opportunities became lesson points and reminders to me.
I shared my 5 lessons in an earlier article. You can check it here.
Let’s roll into another 5 reminders from me watching Shark Tank!
There are different kinds of products and services that appear on Shark Tank seeking funding. Whenever there is a tangible product or an app, all the Sharks first reaction would be to try out the product.
This resonated with one of my favourite practices related to investing – scuttlebutt. The term scuttlebutt was made famous by the great investor Philip A. Fisher. It is a habit where investors collect information by testing and observing a product. It can also be a casual conversation with friends from a specific industry or company.
Scuttlebutt can also be a site visit. A plant visit or visiting a mall which happens to be a retail REIT is fun and investigative. Personally, I like to scuttlebutt because it requires the least effort. Scuttlebutt actually drives me to study a company deeper only if the prospects look good.
2. Valuation is subjective
Valuation can be vague and subjective. There is no definitive formula for a sure win investment based solely on valuation.
Sharks are high net-worth individuals. They have plenty of experiences in business and valuation. Couple with their circle of competence, they would want to get the best deal of a promising pitch. But often, most sharks will have different opinions on the valuation of the same business.
Valuation derives from the company’s business model, the prospects and the risks. Each of us would have a personal risk appetite when it comes to valuation.
We can sharpen our valuation skills by reading up more on a related subject matter. Valuation is a reasoning skill that needs to be picked up and refined. It is not a principle to adhere to blindly.
3. Even Sharks Make Mistakes
Sharks are human too. They make mistakes as well. There are pitches that missed out investments but eventually became successful. They are also successful pitches where sharks poured in money and didn’t work out.
Mistakes are part and parcel of life and investing. Even if an investment doesn’t work out, it should not be detrimental to our wealth. Portfolio allocation and prudent thesis reassessments help to nip wrong investments in the bud. This prevents a full-blown mistake and escalating losses.
Seen any negative signs of a company in your portfolio? Perhaps it’s time to relook into your thesis. If things have changed, cutting an investment with minimal losses would be a wise choice.
4. Non-Transparency & Shady Arrangements are a big risk to investors
There are a few great ideas that quickly turn bad when the Sharks find something fishy. Some pitchers form a separate shell company for funding and raising equity. They themselves will own another company that holds on to the patents and branding rights.
The shell company that undergoes a pitch does not hold the trademark, rights and patents. This put investors in a risky situation and the mercy to the ultimate controlling company. And the Sharks are always pissed off when such information is not transparent.
We can find examples too in the stock market. The Eagle Hospitality Trust and Luckin Coffee scandals are two recent events as of lately. These two incidents show how non-transparency and shady arrangements caused a massive selldown in share prices.
Perhaps the right thing to do is to always swim away from such investment opportunities.
5. Always Opt For The Best Choice
Picture yourself being a pitcher and getting a rare bidding war from all the sharks. You can only choose 1 shark to be your investor. Who should you choose?
Headache? Too many choices? Well, at least it is a good problem.
There are some perfect pitches inside Shark Tank. They often end with all sharks bidding to be an investor. And I am always amazed at how these pitchers make their decisions. They came prepared with a solid pitch. They got all the shark’s attention and bids. And they always are able to choose the right shark to partner with.
Because they already had the end scenario played in their heads. And they already know the best investor to partner with.
Similarly, when the market tanks, there will definitely be a lot of companies out there selling at a bargain price. Always choose the best horse to bet on. Choose the company that has the best business model, well managed, with no fundamental changes in their business model.
It would probably not be the horse that runs the fastest, but it could eventually run the furthest too. And as investors, having a company that can grow throughout time, is a company worth putting money in.
Of course, Shark Tank makes everything sound so easy. We do not see all the sharks going through past performances of a company in detail. But at least they asked important questions, tested the business owners and products before investing.
I hope my lessons on Shark Tank got you thinking like a shark, and not a fish swimming blindly in the big blue sea. Know what you are investing in, keep calm during turbulent times, and never jump into what you are not familiar with.