What do writers, painters, musicians, and investors have in common?
Each lives and dies on the value of their ideas. Inspiration for the next stanza, the next stroke, the next lyric can be painstakingly difficult to come by. Similarly, the next truly worthwhile investment idea is precious and rare.
Our job is to ensure that we have the best investments we possibly can in every portfolio. Doing that job successfully requires two interrelated tasks:
- Challenging existing investments where we have concerns; and
- Successfully identifying new investments that we think offer an attractive risk/reward profile for a return we find acceptable.
The latter requires a perspective on the former because a new idea must be better than at least the least favored name in a given portfolio. Challenging an existing holding can stand alone. If we are concerned about a holding, we should challenge it to spark discussion about how to replace it sooner than later even if we don’t have an idea to replace it.
Investment partners often ask us to articulate our investment process and our idea generation process, specifically. Here are a few tools we use to foster investment idea generation:
- Big ideas. What company has a good chance of having a 3-5x bigger revenue base in five years? What has to happen for that future to come true? Why does the world need its product that bad?
- Affinity. What company makes a product you absolutely love and can’t live without that isn’t broadly known? Should it be in our portfolio?
- Phase shift. What company is benefitting from some breakthrough new product or technology, organic or otherwise? Can it be bigger than the core business? AI at NVDA. Hoka at DECK. There are lots of ways this can happen. Then answer the big idea question.
- Cults. I love companies with cults. What’s a company with a cult that we haven’t talked about?
- Least Favorite. What’s your least favorite name in a portfolio? Why don’t you like it? Are there structural, managerial, valuation issues?
- Forced Comparisons. Pick a name in the portfolio and a related name not in the portfolio. If forced to choose, which name are you more excited about? It may not mean we need to make the exact change, but it may tell us something about the existing holding. Easy to do this with SaaS, retail, consumer, etc.
- Consensus. What names do everyone on the Street or fintwit love? Can they live up to the hype?
- Contrarian. What’s the most beat up, left for dead, piece of junk that no one wants to touch? Should we take a look?
It’s less important that our ideas are unique than that they end up being right. There are no points for originality.
Most ideas are not good. Even though most ideas aren’t good, any idea can be the spark for a bigger idea that grows into the one or two truly great ideas.
We live in this tension. The job is to make sure we have the best investments we possibly can in every portfolio. That only happens through a process of constant challenge, ideation, and upgrade.