Become a Self-Aware Investor

“Time is the friend of the wonderful company, the enemy of the mediocre.” This famous quote by Warren Buffet – who is currently valued as having a total net worth of $78.7 billion – reflects the well-known tendencies of this wildly successful investor to make incredible stock picks, and then to hold his stocks for a long time.

But how does one identify what Buffet terms a “wonderful company”? What drives an individual’s investment decisions? With so many companies and markets to choose from – and endless “expert” advisors offering advice – how does one cut through and identify the right investment route?

Blueprint for Success

As with other situations where there are just too many choices, and you need to weed through the options and figure out find what you’re really looking for – for example, as a student choosing a university or deciding on a career – it’s partly a question of self-definition: understanding what you want, what you believe in, and what your strengths are.

The key to effective decision-making in these circumstances is to develop a personal strategy, i.e., to write out a roadmap that reflects your philosophy and approach.

Every famous investor has a personal strategy. Kevin O’Leary, with a net worth of over $400 million, wants his money to bring back what he calls “prisoners of war.” Peter Thiel, with a net worth of $2.2 billion, talks about identifying disruptive technologies that change how we live, work, and play. And Carl Icahn, with a net worth of $16.6 billion, believes it’s best to buy something no one wants and then get actively involved in the company, bringing about whatever changes are necessary to deliver more value to shareholders.

Bottom line: By creating a personal strategy of investment – what’s known in the trade as an investment thesis – it becomes easier to figure out just where you should invest.

Investing in the Startup Space

An investment thesis is particularly significant in the startup space, which is more risky than other kinds of investment options – and where your investment is, by definition, medium to long term.

As Fred Wilson, co-founder of NY-based VC firm Union Square Ventures, pointed out, “So many folks in the venture capital business are sheep that just want to follow the herd.”

It’s easy to ride a trend and get lured by the unicorns. By first formulating – and then following! – a well formulated investment thesis, you avoid the trends and maintain the ability to keep your eye on the big picture.

So Let’s Get Started

The first step in creating an investment thesis is simply to brainstorm by opening a fresh Word document and reflecting on what is important to you. Think about how and where you are interested in investing, what kinds of companies attract you, and where you feel a natural pull.

Do not self-edit. At this stage of the process, just go with your gut.

It is important to formulate your thinking about the full range of variables. These include parameters such as industry, team profile, investment stage, investment amount, co-investors and partnerships, and target market.

Next, start doing some research. Get into the details: Is there a particular region that attracts you? How much risk can you stomach? What would work for you practically?

At this stage, it is important to put any personal expertise or experience “front and center.” Leverage your professional background or training, where relevant, to your advantage. For example, do you have your finger on the pulse of a specific industry? Do you have insight into a particular sector? If yes, check you are using that information as investment criteria.

Become an Expert

Once you have articulated the ideas that sit at the basis of your investment thesis, educate yourself by reading extensively about the ecosystem you are interested in – both from the perspective of the incumbents, and from the position of a startup.

Publications like the Wall Street Journal, the Financial Times, and Bloomberg provide plenty of information about incumbents. Each major publication has a technology section featuring innovation as well as columnists covering specific areas. For example, Matt Levine from Bloomberg provides invaluable insight into the financial markets and fintech.

For the startup perspective, the main information hub is CrunchBase, but there are other valuable resources out there. Silicon Valley legend Eric Reis’s blog “Startup Lessons Learned” and Mattermark Daily are great places to start. And there are publications and blogs dedicated to specific industries as well. For example, CoinDesk and Ethereum Blog are good sources on blockchain, while medGadget has the latest in medical technology.

They say that death is in the details. In developing a solid investment thesis, you need to explore the specifics of your strategy. The following sections outline some of what that includes: a company’s sector or industry, stage, region, and management.

Identify a Sector

For some, the choice of a sector or industry is obvious. For example, you may feel that you want to stick with an area you know well. Doctors are frequently attracted to medtech deals for this reason.

If you know good people in an industry, that also “counts” as expertise. Or, you can choose to rely on investment professionals and consult with people in your network.

Alternatively, you may be drawn to invest in an area that you feel passionate about. For example, for some, something like drones or robotics are a real pull.

What’s important here is to make sure you have solid expertise in the field and are aware of market trends in the industry. In assessing a sector or industry, there are many parameters to take into consideration. Some of them include assessing barriers to entry, the growth of the entry, what the profit margins are, and whether there is the potential of obtaining a high return on capital.

The Question of Stage

What is the optimal stage of the company that you would consider ideal for investment? Do you want to invest in seed, early, or late? While investing in later stages often means less risk, some investors prefer earlier stage startups, when the valuation is lower.

However, when it comes to early-stage startups, comprehensive research is crucial. You will want to make a very careful determination regarding the company’s chances of success.

You may also want to consider reducing the risk of early-stage investment by diversifying –investing in a larger number of startups. Alternatively, you can reduce the risk by going for multi-stage investments, which provides a nice blend.

Not the What but the Where

In the course of your research, you may discover that your industry is particularly hot in a specific geographic region or even in a single country. Some countries and regions develop unusual specializations or gain expertise in a particular industry.

Alternatively, your decision might be ideologically or emotionally motivated. You might want to invest in your own country out of a sense of patriotism, for example. Or it can go the other way: You may have a particular passion for a country on the other side of the globe – a personal connection to a more remote region.

Israel is a good case in point. Out of the many investors who show interest in Israel, some opt to invest in Israel out of a sense of identification with Israel’s people and history. Others choose to invest in Israel for purely business reasons – perhaps, for example, because they are interested in cyber, and know Israel is the world leader in this field.

And Don’t Forget the Who

In defining an investment strategy, it’s important to consider the significance of a company’s team. Are they first-time founders, or serial entrepreneurs? Do they have the necessary expertise? And, no less important – do they work well together?

Many startups start out with a good idea and may meet your definition in terms of industry, stage, and region, but successful development of an idea also requires an A-team. It can make a big difference if you take the time to study the track record of both the team and its leadership. Elements of good management to look out for include high insider ownership, clean accounting, infrequent restating of earnings, and effective allocation of capital.

Milk the Ol’ Network

After you learn as much as you can from reading articles online, seek out experts who you trust. Find people through your own network, as well as through your network’s network.

Find inspiration through the stories you hear and gain an understanding of what peers and experts are doing. Most important, get solid, critical feedback about your ideas and approach.

Don’t minimize the importance of bouncing ideas off of friends. Bill Gates and Warren Buffett employ this strategy, regularly bouncing ideas off each other. It’s is a crucial stage in the process and a key element in building your success as an investor – because if you can’t convey to a friend why you’ve come to a particular conclusion and defend your position effectively, it’s time either to do more research or to go back to the drawing board.

Keep an Open Mind

While you are reading and consulting, don’t stay married to your original thesis. Once you learn more about the industry, region, or market that you initially targeted, you might discover that it’s not the right place to invest your money, after all.

At the same time, don’t be too concerned about breaking away from conventional wisdom. You may have a gut feeling that goes against what most experts are saying, and that’s fine.

However, if you find there are solid reasons to open everything back up and re-assess your initial strategy, this is the time to do it. Dig up the courage to tweak your original approach.

Stay the Course

The advantage of doing an excellent job in developing a solid investment thesis is that it helps you avoid making the kinds of mistakes that result from rushed, excited, or inconsistent decision-making. An investment thesis gives you a plan of action that is carefully researched and explored.

Let’s have a look at Uber, for example. In recent years, it has been all too easy to get excited about Uber. We’ve known for a long time that the company was heading toward unicorn status.

However, that does not mean Uber is the investment that you’re looking for. If your investment thesis included “the early-stage mobility space with huge growth potential,” the Uber of today is not your intended investment target – though it may seem enticing. Uber is late, and it’s big.

Instead, by following your thesis you can avoid riding the trendy wave of one hot company and opt to invest in an early-stage company that you believe has real potential.

Put It into Action

The thesis helps increase your chances of investing in a big win by forcing you to define a strategy that incorporates your own expertise, personal perspective, and vision of the future. These elements combine to differentiate your thesis. But at the same time, it’s the hard work of dotting the i’s and crossing the t’s – conducting the research, networking, and giving all of it time and thought – that makes it precise and reliable.

Once you finish, it is time to take the plunge. Start investing! Follow the guidelines of your thesis when you choose which companies or funds to invest in – that’s the crucial piece. Successful venture capitalist Reid Hoffman perhaps summed it up best when he said: “It’s useful to be able to recognize whether you’re on track or not. To have the belief, but also paranoia about am I tracking against my investment thesis.”