Publisher’s Note: This is the first in a five-part series that analyzes investing from an entrepreneur’s point of view. At the end of the series, the collected columns will be available for download as a consolidated white paper at www.sbnonline.com.
An extremely successful business friend of mine recently came to see me for assistance on an important issue. Now, as successful as he is — if he and his family weren’t so private, they would be on the Forbes 400 list — he is still willing to reach out to others that can be helpful.
Later in our conversation, he said something interesting that is typical of most accomplished business and/or professional people. He said that while he and his family are very successful in business, they have not been as successful with investments.
His comment is true for many people who have not had positive experiences with investing. One of the major reasons is that people spend an enormous amount of time learning their profession or business, but spend nowhere near that amount of time or effort learning how to be good investors. How good would anybody be at playing the piano, golfing or speaking a foreign language without a significant amount of training and effort?
There are two concepts I would like to share that I think can help anyone become a better investor — and improve in any area one desires. They are rational targeting and relationship mapping. Rational targeting is taking what we really like and what we are really good at doing and using it with relationship mapping, which is the contacts we have. Put simply, it’s collecting the dots and then connecting them by taking what we like and are good at doing and using the contacts and relationships we have made to enhance our success. For example, if you are a successful banker, you can use your knowledge of banking to invest in banks.
Using rational targeting and relationship mapping with our life experiences, business experiences, successes and failures, while also keeping in mind the experiences, successes and failures of others, can help us become good investors. Warren Buffet, perhaps the greatest investor of our lifetime, consistently says it is not about expanding your “circle of competence.” It’s having the discipline to stay within your circle of competence. Similarly, the Pareto principle — 80 percent of your business comes from 20 percent of your customers — works with just about everything in life. It’s a small percentage of things that we need to focus on that is going to make a difference.
In his book, “More Than You Know: Finding Financial Wisdom in Unconventional Places,” Michael Mauboussin says, “the frequency with which you are correct doesn’t matter. It’s the magnitude of your correctness that counts. If you have three losing stocks and one big winner, your portfolio can still come out ahead.” Remember, even Babe Ruth, one of the greatest hitters of all time, struck out.
By taking the concepts of rational targeting and relationship mapping, staying within our circle of competence, acknowledging Pareto’s principle and using this along with our experiences and the experiences of others, we can become better investors.
Next month: Part II – The two major ways to delineate investments