Tuesday, January 17, 2017

Tools for Titans #39 : Gut Investing.

At least according to Tim Ferriss, Kevin Rose is the best stock picker in the start-up world. Compared to the other sections of the book, this section ranks as one of the more important ones for the investing public.

When it comes to start-up investing, most value investors who need to look at accounting statements would be quickly rendered impotent because may startups are hardly profitable businesses. A similar phenomenon occurs when dealing with cypto-currencies so most investors rely on technical indicators to time their purchases.

In such an absence of information, Kevin Rose invests using his gut - he invests by assessing the business idea emotionally.

Kevin looks at the feature of each start-up product and determines how much emotional impact it would have for the customer. He also considers the possibility of a future feature when making such an assessment. In the Twitter example as demonstrated in the book, the main points of consideration were quick public sharing, following and syndication of content. All three features which were deemed to appeal emotionally to the customer.

Within the Twitter example lies the weakness of investing based on your gut. Twitter is not exactly doing particularly well in the market right now so there are limits to investing this way according to emotion. But I'm pretty sure Kevin got a nice sexy exit when Twitter IPOed a while ago.

Tim also credits Kevin Rose with making a prediction on augmented reality much earlier than the breakout success of Pokemon Go.

Unless a person is actually an accredited investor, I do not advise investing by gut feeling. Start-up founders spend inordinate amounts of time honing an elevator pitch which would make anything emotionally attractive. Furthermore, businesses exists to make money, so some attention should at least be given to future profitability. There are plenty of solid cash generating businesses which are boring and will not excite customers in any way.

One final point is that I don't even consider Kevin Rose's approach as being unique in any particular way. Peter Lynch has always advocated an investment idea based on his wife's shopping habits in his book One Up on Wallstreet. I am pretty sure that his wife's fancy is not the sole basis of the considerations he makes when investing in a stock counter.

I think Tim Ferriss is just fixated with one aspect of decision making by Kevin Rose.

I'm sure a deeper discussion would yield a methodology with more moving parts.


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