Question of the week #11
A few people asked this question so that is why I am making it the question of the week.
What role does gut instinct play in your investing decisions?
My gut plays a huge role in my investing decisions. Certainly I want to understand the landscape, the competitors, the concept and the long term strategy. Yet when a company is just starting to grow it is an evolution. What you believe you will do or what will happen is not necessarily what will happen or what you will do. The market is the ultimate answer on which direction a company will grow.
I want to see numbers and plans but at the end of the day it is really my instincts around investing in someone and their company. Is this something that I understand why it is gaining traction and why it is filling a void in a marketplace and is this the right person to build it. That part is gut and to me that is the most important part.
Like this from Vinod Khosla on having to ultimately go to the gut to rise above mediocrity:“I am only interested in technologies that have a 90% chance of failure but, if they do succeed, would change the infrastructure of society in some radical way…But these things aren’t predictable. Forecasting is based on assumptions, and technology changes these assumptions. I never compute returns. If you start forecasting cash flows, you lose innovation, you lose instinct. You average yourself down to mediocrity.”
.I agree with you more than you agree with yourself.I also think that the forecasting of cash flows and other predictive and business planning disciplines should not be completely disregarded and ignored.Once the business takes root these skills — the ability to predict the future on what is now a KNOWN present and past — are basic business skills.It is important not to get lazy and rely only upon the easy methodology. You still have to sweat the details though you may not be constrained by them..
The Truth #seriouswisdom
I recently read something about “instincts” that made the whole concept clearer to me. When you are learning to ride a bicycle, nothing about it is instinctual. You are overtly conscious of every step “Now I put my foot on the pedal, now I’m pressing down, now I’m trying to balance, etc.” But what happens as you learn to ride is that your body is learning to predict what happens in every given scenario on the bicycle. You need to fall so you can figure out how much is too much when you lean. After you get the basics you learn to predict how your body responds with other variables included – riding with no hands, wind speed and direction, hills, wet surfaces.It was that “learning to predict” phrase that I had never truly understood before. And when you “practice” something, you are learning to better predict. In fact, that’s all you are doing. In Malcolm Gladwell’s 10,000 hours essay, he describes practice as “the repetition of an activity over and over with the sole goal of getting better.” I would add that it is with the goal of getting better at predicting that makes a difference between someone who is good and someone who is great. I don’t care if it’s a singer, a tightrope walker or an investor.What you describe as a “strong gut instinct” then, is faith in your own ability to predict.You’ve been practicing this a while, Gotham Gal. You have consciously been trying to get better at your ability to make predictions based on how you see people and companies respond to the changing world around them. You look at variables like which way the wind blows, but that is everything from which way the economic winds blow to which way people en masse might respond to the uniqueness of an idea. You learn to predict the personality traits of entrepreneurs who are the best leaders. You learn to predict everything about how a business grows and succeeds. You don’t always articulate those things – nor should you. If I was riding my bicycle, I wouldn’t want to stop and say to myself “the wind is now blowing at 8 m.p.h from the East, I now have to tilt my body at a 72 degree angle to compensate”. I feel the wind, I compensate, and I ride into it with joy.As an entrepreneur, I do the same thing. I stare at the numbers, I learn to better predict, over and over and over again.
.Every trainee pilot learning to fly an airplane “hits the wall” when learning to land the plane. Instructors know this is coming and are looking for the signs. The student thinks “I just can’t do this right.”This is because the pilot is looking for a “one size fits all” — “do it this way every time” solution.It happens to everyone. It happened to me.You are trying to make the plane land rather than putting the plane in a configuration that as it bleeds off energy whereafter the only aerodynamic outcome possible is for the plane to land itself.This requires a change in mindset from trying to do something to instinctively compensating for the rate of sink, the direction of the wind and the amount of power.Once you get this concept, the plane literally lands itself.Make no doubt you have to develop the instinct to compensate for gusts and bumps and holes in the air but that is all you are doing — compensating for external stimuli and putting the plane in the configuration to land.In many ways that is the story of life and decisionmaking — compensating for the environment and market and putting yourself in the configuration to achieve the desired outcome.Developing and following your instincts. You literally can feel it..
Wow, thanks for this JLM. It makes me want to learn to fly a plane and then apply those skills to entrepreneurship.
agree, except for timing. sometimes you are so far ahead of the crowd that the company you invest in bleeds working capital and goes out of business before the trend hits. Had a friend invest in an ebook company….in 1995.
no doubt timing in life is everything.i was involved with two companies that were literally 10 years before their time. one was called upoc. universal point of contact. it was twitter. the other was called this next. i passed on this one but it is basically fab and pinterest combined. i told the entrepreneur who is a close personal friend, put your ideas in a folder for 8 years and then take them back out. he was too much of a big thinker way before his time.
The right time to roll out an innovation is difficult to gauge — perhaps the best course of action is pursuing it on a very small scale, allowing successes and failures within a tiny intended market of super-early-adopters to improve it until the mainstream is ready. This might just be my sympathetic response — I give you credit for having the guts to tell an enthused innovator to sit on his ideas. I don’t think I could have done it.– Rachel Kowalczyk, Managing Editor, Amble Resorts
I love this explanation. I read something a while ago about gut instincts in relation to a study that was done with gamblers. The upshot was, if i recall correctly, that gut instincts are actually a physical manifestation of work that your brain has done to work through things.
I like it too. Reading the comments makes me think about boarding or skiing. Once you stop concentrating and just let your instincts take over I have found it so much easier. The learned part is already there but you have to trust yourself and let go
Dear Joanne,Thanks for another good question, authentic and understandable answer as well as excellent comments.We keep that 10K hours of practice in mind as we continue to listen to our guts and end users. It’s so helpful to be reminded of this again and again.
And the best part is that your “gut instinct” gets better with experience. Each decision instinctively builds on previous ones.