Stop Thinking You're Elon Musk: The True Art of Investment Management

Investing is both an art and a science. The standardized procedure (the "science") can liberate decision-makers from basic fact-finding and let them focus on more unique matters (the "art" of the investment). 
Jul. 28, 2021 04:37
Stop Thinking You're Elon Musk: The True Art of Investment Management

Investment management is a profession of fantasizers with practitioners who prattle at company executives about big investments in the millions or billions of dollars. Actually, that mountain of money has little if not nothing to do with the managers, nor is investment decision-making completely up to them. But they attach great significance to themselves regardless. You can almost hear them think: "I am managing important businesses, so I must be a very important person myself."

And they never allow themselves to look insignificant. Even though many get the job through social connections rather than acumen or ability, they like to lecture others, posture, and refuse to talk with those who seem less powerful.

That makes them superficial instead of down-to-earth.

 

Doing Anything to Inflate Their Egos

In talks with investors, investment managers only discuss the big trends of the future – as if paying any attention to the present and to immediate business indicates shortsightedness.

In talks with peers, they rave about industries and targeted companies, as if enquiring about deal delivery and due diligence is a rookie move.

In talks with founders, they think they know more about business than the founders. So they give lectures, or they challenge every sentence of the founders, trying to embarrass them.

They assign work to new employees that is beyond their ability. Then, complaining about the new employees' incompetence, they can only make trivial improvements to their work, like switching out Times New Roman font for Garamond – bragging about their investment success in front of the beginners while never touching the underlying logic.

Indeed, the only things they consider worth discussing are the development of human society and cutting-edge technology, all of them Elon Musk wannabes.

But investing is not as easy as that.

 

Investing Is Both an Art and a Science

Investment is a kind of business where you exchange hard work for correct investment decision-making.

How can you make a more valuable decision at a lower price? You need to have a standardized investment procedure that includes standardized parts for the decision-making mechanism, due diligence methodology and research.

The standardized procedure (the "science") can liberate decision-makers from basic fact-finding and let them focus on more unique matters (the "art" of the investment). This art involves the following aspects:

 1.      To-business and to-consumer companies, product providers and platform service providers, projects for angel investors and companies in the pre-IPO stage; these are all different in the pairs. Due diligence objectives and methods should also vary accordingly.

 2.      Different investment managers have different investment strategies. Some may be very price-sensitive about estimated value, while others may think high valuation is no problem if the investment target is good quality. The differences require slight adjustment when conducting due diligence research.

 3.      Some aspects of investment cannot be standardized. Industry trends, people and risks are problems that may vary from one investment target to another, requiring analytical skills and creativity from due diligence research analysts.

I have seen many startups trying to provide solutions to standardize investment decision-making. These include the automatic collection of bank account statements, invoice checking for income verification in due diligence research, and ERP-cross-referenced financial analysis. There is strong market demand for these services.

I believe that one day, investment companies can finish many of these tasks digitally. And that day may come soon.

When it does, some of the investment decision-making personnel, such as financial due diligence (FDD) staff, will get replaced. However, machines are hardwired, while people with flesh and blood are flexible and can always figure out and optimize the underlying investment logic of new investment targets.

That is to say, investment analysts who know the underlying logic will always be valuable.

Topics:
private equity, venture capital, China, investment, fofweekly, GP, LP, funds