From: acquiredfm
A fundamental principle in investment strategy is that it must align with an investor’s personal demeanor [00:00:03]. This means finding an approach that leverages personal strengths and avoids weaknesses [00:00:37].
Aligning Strategy with Demeanor
When an investment strategy suits an investor’s nature, it leads to several advantages:
- Enjoyment Doing what feels natural leads to more enjoyment [00:00:42]. Pursuing something not enjoyable solely for financial gain is considered a “world-class mistake” [00:01:05].
- Competitive Advantage Operating within one’s natural strengths provides a competitive edge [00:00:22].
- Durability Strategies aligned with personal demeanor are more sustainable over time [00:00:24].
Learning, Evolution, and Comfort Zones
While it’s crucial to find a strategy that suits you, it’s also important not to become overly constrained by your comfort zone [00:01:26]. Continuous learning and evolution are vital [00:01:10], including acknowledging and learning from mistakes [00:01:21].
However, an exclusive focus on comfort can lead to missed opportunities. For example, Warren Buffett largely ignored technology, which became pervasive and offered significant business moats similar to those he understood in other industries [00:01:40]. Despite his intelligence, he avoided technology because it was outside his comfort zone [00:02:29].
The Conundrum of Investment Judgment
Investing presents a dichotomy: one must stick to what they are good at and what fits them, yet also be open-minded and willing to change [00:02:45].
Key paradoxes in Investment Decision Making and Judgment:
- Confidence vs. Pig-headedness Investors need confidence to back uncertain ventures and stay with them through downturns, even buying more when prices decline [00:03:00]. However, this confidence must not devolve into pig-headedness, throwing good money after bad [00:03:13].
- Concentration vs. Diversification Holdings must be concentrated enough for good ideas to make a significant impact, but diversified enough to protect against unforeseen risks [00:03:21].
These complexities highlight that investment decision making cannot be reduced to an algorithm; human judgment is paramount [00:03:41].
The Role of Judgment
Success in investing, particularly in areas without clear roadmaps, relies on making better qualitative judgments about the future [00:03:53]. Computers are not yet capable of discerning which business plan will become the next Amazon or which CEO is the next Steve Jobs [00:04:20]. The ability to consistently identify such opportunities indicates skill, not just luck [00:04:45].
What is Second-Level Thinking?
Judgment in investing often stems from “second-level thinking” [00:06:01]. This involves:
- Thinking at a higher level than others [00:06:04].
- Thinking differently and more correctly than the consensus [00:06:06].
- Possessing perception, knowledge, advantage, insight, and context [00:06:22].
This “intangible” skill is difficult to teach, akin to coaching height in basketball [00:06:30].
Components of Sound Judgment
Sound judgment combines:
- Deep knowledge and understanding A clear framework for what matters and why [00:06:51].
- Rationality The ability to think logically and avoid emotional influence, which also involves understanding personal biases [00:07:01].
- Intellectual humility Acknowledging the possibility of being wrong and knowing the limits of one’s knowledge [00:07:16].
Evaluating Judgment in Others
When recruiting or making investment decisions, evaluating others’ judgment is crucial.
Key qualities sought in individuals:
- “Smart Eyes” Exceptional people who intuitively grasp concepts and understand what is important beyond readily available quantitative information [00:08:07]. An example is understanding that “the cure for low oil prices is low oil prices” [00:08:26].
- Team Players Individuals who can work collaboratively, exchange ideas, and benefit from input across all levels of an organization (peers, superiors, subordinates) [00:08:37]. Lone wolves or “eat what you kill” types are generally avoided [00:08:51].
Evaluating Founders in Venture Capital
In venture capital, a significant portion of the investment decision making process involves understanding and backing the right founders [00:09:16].
To assess a founder’s judgment:
- Focus on their story Instead of just résumés, understand their background and the reasons behind past decisions [00:10:00].
- Unfakeable experience Past actions and decisions are harder to fake than prospective answers from interview guides [00:10:29].
- Learning and Evolution Look for evidence of learning, evolving, and making decisions based on first principles [00:10:39].
- Going Against the Herd Seek individuals willing to defy consensus and act on their passions, whose ideas stem from specific knowledge of real problems [00:10:45].
- “Weirdos” / Unconventional thinkers Truly exceptional founders are often “weirdos” who are multiple standard deviations from the mean in a specific area, allowing them to think for themselves and possess conviction in their unique views [00:11:36]. This unconventional thinking is crucial for startups, where there is no clear map [00:12:10].
“The path to exceptionality cannot come through doing what everybody else does” [00:12:52].
Exceptional results in investing and entrepreneurship require individuals who see things “differently and better” [00:13:17]. This means being “uncomfortably idiosyncratic” and willing to be out of step with conventional wisdom to achieve a competitive edge [00:13:28]. The best startup ideas, even with the best algorithms, require exceptional founders to build and out-compete others [00:14:18].