Think Fast – Lessons For Dating, Investing by Matt Brice, The SOVA Group
Imagine you are on a date. The female counterpart (in my case) suggests that we relax after a nice meal by watching The Real Housewives of New Jersey. Strike one, you are out. This is my blog post, so I can dictate the rules–in my dating baseball game, you only get one strike and you are out.
There are many reasons to eliminate a potential partner from your future marriage pool.
She likes the Yankees, the Lakers, uses a Blackberry, enjoys cooking spinach, prefers Superman to Batman….The quicker you can strike a woman off the list, the less time you will waste determining if she is a good fit.
Similarly, you can strike companies off the list.
Here’s a short list of good reasons to strike companies off the list:
Commodity producer: bad economics (AK Steel, U.S. Steel)
Large Customer with strong bargaining power: Almost any company that counts Wal-Mart as a 30 percent of more customer (Iconix Brand, Cherokee)
Capital expenditure requirements consistently exceed operating cash flow (most oil and gas exploration companies, commodity producers)
Government contracts that the company touts as permanent, but could easily be lost or renegotiated (Liquidity Services).
Tech that is too hard to understand (Akamai Technologies, many others here)
Pharma (self-explanatory)
Anything that is outside your personal circle of competence (personal list is too long to reproduce here)
Shady industry, where customers are getting scammed (payday lenders, most for-profit colleges, some timeshares)
Too much debt (Valeant, the list could be long with this one)
Roll-ups (Valeant)
Retail Fashion (absurdly competitive with fickle customers)
Fast/Casual Food (not much different from retail fashion)
This is my list, but I encourage you to make your own. Write it down and be wary of making an exception. Are there others I have missed? Counterexamples where you have made an exception and why?
Buffett has said the following:
Interviewer: You process information very quickly.
Warren Buffett: I have filters in my mind. If somebody calls me about an investment in a business or an investment in securities, I usually know in two or three minutes whether I have an interest. I don’t waste any time with the ones which I don’t have an interest.
Two or three minutes, sort of like speed dating. You can easily and quickly eliminate companies from the investment opportunity set.
The upside? By spending less time with those who are not a match, you get to spend more time with the one who is a match.
