Ever wonder how investors turn ideas into money making opportunities?
Maybe you saw a story in the news and thought, “There’s got to be a way to make money off what’s going on right now”…
But if you’re like most people, you don’t know how to find an existing investment opportunity – or create a new investment opportunity – that makes sense.
Last week, we talked about the importance of understanding Narratives in early stage investing – an important skill when you’re being pitched a deal.
But if you can’t anchor the company Narrative into a more substantive Investment Thesis or Worldview…
It’s easy to get sucked into exciting money-making opportunities that – for a variety of reasons – don’t actually reflect the reality you believe is likely to happen.
That’s why today, we’re going to be talking about one of the most important aspects of investing in early stage companies…
How do you “see” the world around you? And do you “see” the world the same way the company (or a promoter) raising capital does?
Let’s dive in,
-Jake Hoffberg
P.S Looking for back issues of Private Capital Insider?
The Wisdom of Worldviews: How our beliefs impact our ability to see
When I was studying for a degree in Music Business at Indiana University, I took several classes in something called “Arts Administration.”
How I went from music to finance is a story for another day, but in one of my classes, I read a book called “Ways of Seeing” by John Berger.
One of the major themes looks at establishing the relationship between what we see and what we know, and how our assumptions—about form, class, beauty, taste, and gender—affect how we see a painting.
Seeing comes before words. The child looks and recognizes before it can speak.
But there is also another sense in which seeing comes before words. It is seeing which establishes our place in the surrounding world; we explain that world with words, but words can never undo the fact that we are surrounded by it.
The relation between what we see and what we know is never settled.
Each evening we see the sun set. We know that the earth is turning away from it. Yet the knowledge, the explanation, never quite fits the sight.
The way we see things is affected by what we know or what we believe.
Yet this seeing which comes before words, and can never be quite covered by them, is not a question of mechanically reacting to stimuli.
We only see what we look at. To look is an act of choice.
What does any of this have to do with seeking out investment opportunities?
When we are analyzing an investment opportunity, what we often look at is a form of “art” – an overall Image constructed of pictures, words, charts, and graphs.
Regardless of the presenting party’s noblest intentions, this Image is inherently biased – both by the inclusion and exclusion of whatever facts, figures, and focal points they deemed most important.
In reality, this overall Image is a record of how the presenter or Observer sees the Subject (aka “the investment opportunity”).
In many cases, this Image is regarded as “evidence” of a fixed moment in time. For example, a photograph you took on a family vacation is “evidence” you were at a certain place, at a certain time.
Yet, when an Image is presented as a work of art, the way people see the Image is impacted by a variety of different learned assumptions about art.
And this brings us back to the core task we face as investors…
More specifically, when we attach the Narrative to the assumption driven financial model…
What are the assumptions we have been trained to believe about the Image? Maybe it’s due to the formal or informal training we’ve received.
What are the assumptions we are being asked to believe about the Image?
According to Berger,
When we ‘see’ a landscape, we situate ourselves in it. If we ‘saw’ the art of the past, we would situate ourselves in history.
When we are prevented from seeing it, we are being deprived of the history which belongs to us.
Who benefits from this deprivation?
In the end, the art of the past is being mystified because a privileged minority is striving to invent a history which can retrospectively justify the role of the ruling classes, and such a justification can no longer make sense in modern terms.
And so, inevitably, it mystifies.
Mystification has little to do with the vocabulary used. Mystification is the process of explaining away what might otherwise be evident.
Although I’m sure we can all draw political conclusions from the author’s quote…
We could easily transfer the analogy to the world of business and finance; for example, the entire topic of “disrupting industries” is – in many ways – a description of how startups feel about the entrenched status quo.
However, the purpose of this discussion is to acknowledge the importance of “Seeing” in the context of investing.
Should we simply accept the Image as Truth – and therefore, how the Observer views the Subject – we are, in effect, “seduced” by the Narrative.
In the context of art or entertainment, the willingness to suspend disbelief and enjoy the experience is part of the fun.
But as early stage investors in search of potential profits, we have to connect the “Art of the Possible” with a stable version of Reality.
If Ways of Seeing describes the way we look at Images… a Worldview is the way we combine those Images (and assumptions) into a cohesive Narrative.
For example, in the Christian worldview, the assumption is that God is real, and is the omnipotent Creator of the universe and all life.
As a result of this assumption, it provides Christians with a worldview regarding matters of humanity, redemption through Christ, and what happens after we die.
Conversely, in the Naturalism worldview, the assumption is that all life arose through natural law, absent a divine creator.
As a result, the Naturalism worldview revolves around evolution, an absence of “good” and “evil” forces, and the inevitable entropy of all systems.
We could also talk in terms of a Western Worldview vs Eastern Worldview – or even more specifically, an American Worldview.
And depending on which Worldview you follow, the way in which you see both historical and current events are inevitably colored through this lens.
But what does this have to do with investing, you ask?
How you see the world will have an impact on your analysis of any particular investment opportunity.
While I am not here to tell you what to believe – or what Worldview is, or is not, correct – I do think it’s important to understand that Worldviews are based on assumptions…
And that if you can focus your attention on the key assumptions that lead people to believe in a particular Worldview…
This is the essence of underwriting and financial modeling.
“Why should I believe these financial projections are going to come true?” requires a discussion about the Worldview the management team has, and the assumptions the model of the world they are presenting is based on.
In many ways, it is the shared Worldview – and the ability to recruit more people into that Worldview – that creates the opportunity in the first place.
But how do you know if your Worldview is correct? Unfortunately, you don’t.
It is for this reason I suggest that the most important element of being a successful investor is building assumption driven financial models…
And then watching how that model performs over time.
❝The greatest test of your expertise is how explicitly you understand your assumptions.Kevin Ashton
The purpose of this exercise is to remind ourselves that, when presented with new evidence, we are allowed to change our assumptions, and therefore, change our Worldview.
And I also suggest that it is far more effective to debate the assumptions being used in any given model than it is the outcomes the model projects.
Which then begs the question…
How do you develop a Worldview in the first place?
Chances are, you’ve heard some version of the Peter Lynch quote “invest in what you know.”
But if you are just starting out, and don’t really “know” about anything, what do you invest in?
How do you learn about something well enough to decide you are capable of investing in it…especially when there is so much uncertainty in the task of trying to predict the future?
In my opinion, it starts with building a stabilized Worldview (which inevitably leads to the wisdom needed to act within the context of a specific worldview).
To some degree, you might find some comfort in oft-repeated investment quotes and maxims…
But after my years of experience as a financial ghostwriter – and now as publisher here at Equifund – it all comes down to three core skills:
- Reading Comprehension – When I first started reading financial news and studying investing, I had no clue what the heck was being discussed. But over time, I started to learn the “language” of finance, and now, it’s much easier for me to understand the conversations that are happening all around me (and what the charts and graphs ACTUALLY suggest).
- Critical Thinking and Analysis – One of the hardest parts of analysis is to ingest huge amounts of information, decide which bits are relevant, and then think about how they all connect to each other.
- Communication – Last, but most certainly not least, the creation of a Narrative that can be transported across space and time, in a way that can be easily understood by others, is where the magic is.
While Private Capital Insider certainly serves a business objective for Equifund – the more you understand the way we “see” the world, it stands to reason it would increase your trust in our brand, as well as investing on the platform…
In many ways, this newsletter serves as a mechanism for me to clarify my own Worldview and “put it to the test” via comments I receive from you, our readers.
And in that pursuit, I’ll be devoting some of our future issues to exploring the Worldviews of OTHER private market investors – like KKR, Blackrock, and Apollo – over the coming weeks ahead.
