The Most Important Phrase For an Investor: “I Don’t Know”
Investment returns are determined by the investments made, not those you’ve passed on
Waiting for the right pitch in your sweet spot requires passing on a lot of opportunities
Saying “I don’t know” allows you to divert attention to more definable opportunities
The Most Important Phrase – “I Don’t Know”
Have you ever watched stock market investing segments on TV? I used to be impressed that the host would be able to share their recommendation on any stock at any time when asked. I wondered how they could know so much when the world (along with stock prices) is constantly evolving? After joining the industry in 2008, I set out to become an expert and met several very talented investors along the way. What I learned surprised me. It sounds impressive to have an opinion on everything all the time and it can make for entertaining television. However, the truth I found was that investing is too difficult to have an answer for everything. Humility is much more important because overconfidence can lead to very expensive mistakes. Successful investors must learn to say, “I don’t know.” If you are a competitive individual like me, it does not come naturally and requires constant training.
Wait for the right pitch
I’m a baseball fan (Go Cubs!) so you’ll have to forgive me for using this quote, but I think it explains the concept well:
“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!, Ignore them.”
-Warren Buffet
Over the course of my career, I have evaluated hundreds of companies as potential investments, but I have only invested in a small fraction. Why? First, we have to acknowledge that we cannot be certain about anything with investing and focus instead on probabilities and educated guesses. Some of these investment opportunities did not have the characteristics that I look for and so were discarded. Many were instead set aside because they presented problems that I couldn’t get my hands around. “I don’t know!”. The remaining few I invested in because they had characteristics that I believed would likely lead to a strong return. You see, our investment returns are dictated by the investments we make, not the ones we forgo. Saying “I don’t know” is essential to the process of eliminating investments where the probabilities are too uncertain.
Is Airbnb a fat pitch?
As many of you are aware, Airbnb is expected to IPO in December. I love the service and I believe the sharing economy is pretty powerful so I decided to review the prospectus, and talk to some folks in the industry. Ultimately, I decided to let this pitch go by. That doesn’t mean I’ll never invest in this company. Typically, it takes a couple of years of studying a business for me to have the confidence to buy the stock. But for now, I have to say “I don’t know”. Let me explain. While the brand is incredible and guests are extremely loyal to the service, I have concerns over Airbnb’s ability to build and protect their profit margins. Some of my previous posts focused on economic moats. For a refresher visit here and here. I’m not convinced there is a sustainable economic moat (to protect profits). You see, Airbnb’s hosts typically list their property on multiple sites in addition to Airbnb such as VRBO, HomeAway, etc., and sync their calendars to avoid double booking. Many even list their properties on their own websites while encourage returning customers to book there, thus cutting out the middleman. Plus, you have Google, Bookings, the hotel chains, and numerous niche startups looking for their cut of the action. That could prevent Airbnb from charging high enough prices to earn bumper profits because they would risk losing business to other platforms. It appears too easy for customers and suppliers to switch to other services. While you never really “know” for sure and I will comfortably let this pitch go by, I will continue to look for evidence that contradicts my original assumption.
In Summary
At Aurora, we are constantly looking for “the right pitch” in our sweet spot where we believe the probabilities are in our favor. This blog represents our thinking at the time of publication. If you are a DIY investor, use this only as a starting point for your research, and be sure to do your own due diligence. For questions regarding our individual stock strategies, please reach out to us!
Invest Curiously,
Austin Crites, CFA
Austin Crites is the Chief Investment Officer of Aurora Financial Strategies, a financial advisory firm based out of Kokomo, IN. He can be reached via email at austin@auroramgt.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser. This blog does not constitute advice. This is not an offer to buy or sell securities. Advisor is not licensed in all states. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BCGM Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Clients may own positions in the securities discussed.
