After reading hundreds or perhaps thousands of articles, speeches and books on business, investing, psychology, and people, I’ve come to believe that much of the advice on business and investing available to young people is painfully vague, unhelpful and/or generic. Self-improvement and general business advice seems to be ubiquitous these days, and it does hold value, but at the end of the day success in business and investing requires more than positive visualizations, reciting your gratitudes, writing down goals, etc. etc.
There comes a time when you actually need to do something, i.e. create or invest in a product or service of differentiated value and get it to market.
Detailed below are eight questions that I ask myself when trying to reveal the fundamental nuts and bolts that lead to success in a specific life decision, business or investment. I believe that these questions bridge the gap between the self-improvement mental state that most of us are now implementing, and the desired end result of success in business and investing, which most of us are still trying to achieve. These questions are simply a way of organizing mental models to assist you in provoking thought processes that prevent common failures in business, investing and life. None of this information is by any means original; I have borrowed and organized much of it from the people that I study, both alive and dead, who have used these simple thought processes to lead successful lives.
I will begin with the four questions I use for almost any situation in everyday life, not entirely specific to investing and business but very applicable to both. I will then go over the four questions I ask myself that are specific to investing in or starting any business, all of which are followed by some general explanation and antidotes to errors.
1. Is the environment around me helping me move toward success, or is it holding me back?
You are a product of your environment, whether you like it or not. You become your associations, and your associations have compounding effects. Good associations beget more good associations, and likewise for bad associations. In other words, good people will introduce you to more good people and environments (by good I mean like-minded) and likewise the opposite. Associations have a profound effect on your day-to-day experiences. Be selective with whom you befriend, and surround yourself with people that you respect and would like to become more like. It’s no coincidence that, when you spend a lot of time around a person, you both naturally begin to think alike, speak alike and act alike. Always remember that, to receive different results, one must change the inputs that created the current result. As children, we have no control over these inputs; good or bad, our environments are provided for us, hence “the apple does not fall far from the tree,” but as we grow older, we can control the inputs, so it behoves us to be conscious of who and what we surround ourselves with, for what we surround ourselves with is what we are becoming. Analyze your life in terms of its environment. Are the things and people around you helping you toward success—or are they holding you back? If it’s the latter, do yourself a service and choose to disassociate from the toxic person, or remove yourself from the negative environment.
2. What are the motives?
More specifically, what are my motives and what are their motives, and what incentives are affecting those motives? Who will gain what? What do they want to gain? When making any meaningful decision, this is always a prudent question to ask yourself. Motives are the physiological gasoline that drives people into action or inaction. Stop and ask why you are taking action, and why are they? We’ve all heard of ulterior motives or a wolf in sheep’s clothing; what we see is not always what we get. If you stop and take the time to contemplate the formative principles of things bare of their coverings, the purposes of actions by all parties involved in any engagement, you may see a clearer picture and make a decision different from your natural instinctual decision. Many people like to think they can trust their fellow man, that the world is made up of a seamless web of deserved trust. Unfortunately, this is not always true; as a result of our life experience many of us have different ideas of what right and wrong are defined by. This then affects one’s motives and ultimately one’s actions.
3. What is the opportunity cost of the capital?
The third question I ask prior to making any meaningful decision is what else I could be doing with my capital or whether there is a more valuable alternative. By definition, opportunity cost is the cost of an alternative that must be forgone to pursue a certain action. There are often hundreds or thousands of different ways one can spend a dollar at any given time, some of which are much more beneficial than others. Always ask yourself what the alternative is to any financial allocation, and move forward with what you feel will provide the most value and benefit to your life. “There’s a trolley every fifteen minutes,” meaning that investments will come and go, so don’t feel that the current one is the only one. It may feel like a “once in a lifetime” opportunity, but opportunities are numerous, so hold out for the opportunities you feel carry the lowest opportunity cost.
4. What is the opportunity cost of the time?
Along with making the decision about where to place your capital, it is perhaps more important to contemplate the same question in terms of your time allocation. Any successful businessperson will tell you that time is their most valuable asset. Time is just—rich people can’t buy more of it, scientists can’t slow it down, you can’t save it to cash more in for another day. Good businesspeople loathe people who waste their time. One can always earn more money, but one can never earn more time. Ask yourself if you are spending your time wisely and adjust your schedule accordingly to maximise your ROT (Return on Time).
Specific to business and investing:
1. Do I know and understand the business and the industry in which it operates?
To understand the value of a company, it is imperative to understand first how the company’s product or service is applicable to the market it is targeting. If you do not understand the business and industry, you will certainly not understand the company valuation and how the products or services provide value within the industry, or the second- and third-round effects on society, which are often overlooked. This is the reason that many very successful people have specialized knowledge in the specific field or industry that has created their wealth, and it is why they often advise people not to invest time and money in something they do not understand. For example, Warren Buffet and Charlie Munger refuse to invest in tech companies because they do not understand their valuations and feel that many of them provide little or unsustainable value to society. Stay in your warm market and invest in the companies and industries that you are familiar with.
2. Does this business have able and trustworthy management operating it, or, alternatively, is this potential partner able and trustworthy?
This seems like a no-brainer; obviously, companies cannot succeed without competent and responsible people operating them. However, the judgement of character can be one of the most difficult aspects of business and life in general, especially when selecting partners. Do not get into bed with someone you have not performed proper due diligence on, both literally and figuratively. Take the extra time to examine their past track record, relationships, and experience. I learned this the hard way twice, and I highly recommend taking the extra time to research people thoroughly prior to investing your time and money in them. The alternative to doing this could be much more costly and time-consuming. According to Abigail Van Buren, “the best index to a person’s character is (a) how he treats people who can’t do him any good, and (b) how he treats people who can’t fight back.”
3. Does this business have a durable and sustainable competitive advantage?
As the first investor in Google and billionaire David Cheriton once stated, “if you provide real value to the world and do it in a sensible way, the market rewards you.” And it’s almost that simple; I would add that the “real value” being provided must be protected, usually through the acquisition of intellectual property rights, which gives a person or company a virtual monopoly. In advice from successful business people, there are a couple tips that always seem to come up in one form or another: 1. work hard (which is a meaningless and vague metric, in my opinion), and 2. provide a unique value proposition. In other words, differentiate. This is perhaps the number one golden rule in business: ensure that you have a competitive advantage, i.e. patents, trademarks, trade secrets, exclusive rights, solid relationships with decision-makers, being first to market, etc. If you can invest in or provide a differentiated product or service that solves a common problem and is patent-protected, you are almost guaranteed to succeed while that problem exists, and other companies cannot legally take market share away. Any true competitive success requires uniqueness; it requires you to create some different form of value than your competitors. Simply put, if a company does not have some form of durable and sustainable competitive advantage, there is a strong chance that returns will not be above average, at best, or will be unsustainable.
4. Am I getting a bargain price?
No matter how wonderful a business is, it’s not worth an infinite price. You must be getting a price where the market value is less than the intrinsic value. This provides a margin of safety and room for upside, which is always wise to maintain concerning the natural vicissitudes of life. There are many ways to value a company, and it can take a lot of time to learn how to do this effectively. Many of the larger public companies’ financial metrics are available online. Private companies are more difficult to value and should be valued with the help of a competent individual who has experience in doing so, i.e. a professional account or analyst. Invest only when your due diligence shows that the company is selling at a discount.
Dane Aull is the president and founder of Newtech Energy Services Inc., a Calgary, Alberta-based company focused on investing in and developing products and services that provide solutions to common problems found in the energy industry.