Think Fast – Lessons for Dating, Investing

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.

More to Explore

Returns for Great vs. Bad Businesses

Munger and The Cattle Rancher

Munger’s ability to find great businesses is directly related to his ability to consistently discard bad businesses. He is excellent at inverting, and discarding the bad businesses as quickly as possible.

The Abominable No-Man and Bad Management

Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

This Post Has 2 Comments

  1. Thanks for your thoughts. Do you think there are any exceptions? Tech that is understandable, roll-ups (my first thought is DaVita), food?

    1. I do think there are exceptions. And I struggle with when to make an exception. I need to do a post on DaVita and its history. Weschler hit it out of the ballpark with that investment and it was fairly non-traditional (roll-up, accounting issues, govt investigation, etc). Thanks for mentioning that.

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