How do you make investment decisions?
How do you decide whether to invest in something like Bitcoin, or a small business, or a startup, or shares?
Mastery of capital allocation takes time and patience. It has been argued that it is the skill that separates the ‘outlier’ CEOs from the ‘average’ CEOs.
The easiest step is simply reducing your error rate.
A poor investment (e.g. 50% loss) takes a disproportionate gain to breakeven (e.g. 100% gain). This means it is more important to avoid the poor investments than it is to try and ‘pick the winners’.
Or as Howard Marks often says, if you avoid the losers the winners will take care of themselves. So whether potential investment ideas are your own or those of others, I think the most important thing isn't necessarily the number of things you look at, but rather knowing when you should stop looking at that idea and move on to something else before your own psychology makes you see things that may not really be there.
By not even thinking about things that don't pass certain filters, you'll probably miss plenty of good ideas, but you'll also avoid plenty of good stories that turn out to be bad investments.
Simple filters to apply to an investment:
- Is there a moat?
- Can it be understood?
- Are management in place with integrity and talent?
- Is it reasonably priced with a margin of safety?
This will certainly not guarantee that you will not have any poor investments, it will swing the odds in your favour.