Investing is simple but not easy.
Likewise, basketball is simple but not easy. All you need to do is put a ball with a 9″ diameter into a hole with a 17″ diameter. Simple, right? That is until you have a great athlete in your face playing defense along with the pressure of performing when it really matters.
Investing is simple because all you need to do is buy a meaningful amount of a business that is selling for less that it is worth and hold on until the market recognizes its miscalculation. This is not easy because it requires a rational framework that fully respects both the intelligence and skill of your counter parties and the high degree of efficiency often present in markets, along with the emotional discipline to act rationally in the face of fear and greed.
One common error of investors is to make things too complicated. One embodiment of this is the complex financial models found in analysts’ spreadsheets. Without a grasp of the right questions and a good dollop of wisdom, these can often obfuscate as much as enlighten. There is a reason Buffett does not even use a calculator when valuing a company.
The key to being a great investor is knowing how to ask the right questions and then only investing when you can actually answer them with a high degree of certainty and conviction. You do not need to do this very often. In fact, it is probably not possible to do it very often.
When NBA rookie Derrick Williams worked out with Kobe Bryant over the summer, he asked Bryant what moves he should work on. Bryant told him it was not a question of having a lot of moves, but rather having a small number that he could actually execute and finish – that were unstoppable.
If you want to have that kind of success as an investor, spend your time figuring out the pivotal questions upon which your investing thesis is based. Eschew false precision and seek broad certitude.
Consider how Greenberg explained at Columbia how he decided to invest in Google. Greenberg admits that there is a lot that he does not know about Google. But he does know that people now spend 30% of their time online and that 10% of advertising is done online. He is willing to bet that over the next five to ten years the percentage of advertising done online will catch up with the percentage of people’s time spent online. He does not know exactly how it will play out, but he does believe that Google, with a 50% market share in online advertising, will get its fair share.
Focus on asking the right questions – the big, broad ones that really matter. If you get these right, the answers will shakeout out into the knowable and unknowable. If you focus on investing in the first camp and have the discipline to not overpay, you are well on your way to beating the market.