Howard spews investing advice every Monday (usually), he talks about the individual companies he invests in all the time on StockTwits and isn't shy to discuss his reasoning behind each of those picks. As you may have picked up on, the Investing Lessons series that has looked at Fred Wilson and Chris Sacca focuses on lessons that we can take back and incorporate into our own investment strategies. While it may be great to follow Howard into some of his picks (like Pabrai, I'm a fan of cloning great ideas), I think it is more valuable to learn from his examples and discussions about how he invests. Howard recently popped up in a foundville interview and provided some insights into himself and his thought process.
Thinking through the lessons we can learn from Howard with my more value oriented view of the world makes for some interesting insights...
Lesson #1 - Invest With The Sharks
Howard walked through a mental model he has about the ecosystem around the great white shark. He talks about how being the pilot fish in that ecosystem provides an opportunity to have the shark's protection and how that protection affords an investor the opportunity to take some risks that aren't as dangerous as they otherwise would be. I think those sharks come in many forms.
For me the biggest place that shark came into my investing was my investment in AIG, this was a failed company - bailed out by the U.S. taxpayer. If you look at the surface of the investment it is pretty risky and one that would require a lot of protection to take. Looking under the surface though there are a couple of sharks providing some protection. Benmoshe (our modern day insurance oracle) was brought out of retirement to turn the company around, the U.S. government took a stake (despite an enormous amount of outcry by the public), and looking at the books in the last year these protections have proved to work out. The U.S. government is turning a HUGE profit, AIG is trading for well below valuation, and this risky investment that came with a lot of protection continues to look better every day.
Lesson #2 - Play Games
Yes, I said play games!! Risk, Poker, Chess... Howard referenced all three when talking about strategy, investment, and building companies. He infers that there is a lot of value that investors can get from playing games. Assuming of course those investors are able to turn the lessons they learn playing Risk into analyzing companies they are investing in. Of course I'd recommend Settlers of Catan which is all the rage for startups in Seattle.
One of the major references Howard made was that in Risk, a player needs to build a solid position in one area before expanding. Looking at countless case studies, this is nearly always what companies that would be good investments do. Buffett often refers to this as building a franchise first and expanding from there. Wal-Mart is a prime example. They built a great position (literally in one part of the country as they would in risk) and expanded from there.
Lesson #3 - Can Management Change With The Industry?
Howard talked a lot about himself and the difficulty he presented to investors. The difficulty that his track record was to build great things and sell them quickly. His ability to find the next great idea and his lack of ability to be a great operations guy. This inferred a little bit that the team is important (as other VCs have mentioned). He outlined why he believes his current startup is a little different. He has a larger number of people and has found that the vertical he is playing in is not on the radar of others (meaning he has a lot of room to expand his business).
Investors need to understand management's anticipated longevity. Are they looking to flip the company, IPO, run it forever, etc? Are they looking to go on a never-ending growth trajectory or will they start paying dividends as soon as they start becoming profitable. If the managers find themselves in a position to continue to innovate and grow, do the managers have what it takes to do so? I keep thinking about iGo, they have some great products, they have some great innovation, but the space is crowded and management hasn't proven that they know how to differentiate themselves in a business where competition is tough.
Lesson #4 - The CEO Doesn't Do Everything
When pressed about his overwhelming duties as CEO... Howard quickly and succinctly outlined his only duties as CEO. This seemed to be a theme for Howard. He either on-purpose or by accident partnered or hired the right people to work with, this way he could do what he loved and they could do what they loved. The reverse was true as his worst mistake he ever was to have a bad business partner who was stealing from the business. Howard also publicly described his feelings for Timothy Sykes.
It is important to think through this in your own investing. I know the CEO gets most of the press, but what about the other people? I have talked about how excited I am that Ron Johnson (the guy that invented the genius bar) is turning department stores on their head over at JC Penney (of course JCP is attracting a lot of attention because of this) - but it isn't just Ron. Ron is hiring specific people that he can rely on to make the right decisions in the right places (such as hiring Laurie Beja Miller specifically to build "The Square"). It takes a team and as Howard points out, the CEO does have a job description just like everyone else!
Lesson #5 - The Playing Field is Level
Howard reminds us that it is a level playing field out there. This lesson is short... but very important!
You as an investor have the capability to have just as much of an edge as the next guy. There is no reason why you can't pick great stocks, buy great ETFs, or invest in a truly great piece of Real Estate. I have been investing in the single family home space since I was 19. I grew up playing monopoly and watching my Dad try to build a real estate empire. For some reason I got it stuck in my head that single family investments that I funded was all I had the capacity to do. I read books on multi-family and commercial real estate investing, researched deals, and couldn't find a way to take it forward. Recently I met a fellow real estate investor who laughed at me and said there was no reason I couldn't move into commercial real estate. He offered to partner with me on a deal and.... My first commercial deal is on its way to closing. Granted I am not running the deal entirely but given the suprising amount of existing knowledge and capability that I have in the space I plan to be doing my own later this year.
Howard's advice that it is a level playing field out there is important. There is no reason to pay someone 2% of your earnings just so you can get market average returns - that is called LOSING MONEY. You need to realize that you can step up and put together your first big commercial real estate deal, drop the investment advisor, or pick some great things to invest in - it is a level playing field out there - you just need to get off the couch and get onto the field.
Stay tuned for the next Investing Lessons From Venture Capitalists post!!