by Robert Kantor

 

In previous posts, I have discussed the importance of investing with managers who have specialized experience in the sector in which you plan to invest. This is true whether the investment is a mutual fund, oil and gas interest, a limited partnership in a hotel or shopping center, or stock in a high-tech or old economy business.

This post delves further into the experience factor and three characteristics that investors should seek in an investment partner — integrity, intuition, and instinct.

By experience, I mean that an individual has been intimately involved in an industry or investment sector on a full-time basis for an extended period – at least five to 10 years. Length of tenure is important because it demonstrates an aptitude and willingness to manage through various economic environments.  Success in a bull market is a poor indicator of overall competence.

Integrity. Even before experience, comes the need for your investment partner to possess integrity — honesty and strong moral principles. It is quality of character that is not easily identified through credentials or transaction histories, and often reveals its presence or absence in subtle ways. Always scrutinize your potential investment partner’s behavior and be sure that it is consistent with your value system.

Intuition. Not innate, but rather learned after extensive long-term training, intuition is the ability to understand something immediately, without the need for conscious reasoning. Intuition is the product of both success and failure and reflects an individual’s capacity to apply prior knowledge gained from prior experience in new or different contexts.

Intuition is not knowing the answer before a question is asked; it is knowing how to answer the question once it is asked. All successful business operators know how to address the big and small challenges they face on a daily basis. There is no silver-lining to naiveté.

Based on lessons learned, your intuition should guide you as you employ these three methods when evaluating your investment partner(s).

1. Get it in writing. Get all information that is given by the entrepreneur, company, broker or investment advisor in writing, or you can write a letter to them confirming what information was provided. A verbal recitation of an investment’s attributes is promotional and wholly inadequate as a means of investment due diligence.
2. Take notes. It’s not that anyone would deliberately mislead you, but they are liable if they do! If it is a team of people, request each team member’s resume and track record. The track record is a compilation of specific projects in which the management group or entrepreneur had been involved. Here, we are attempting to discern if the players have the requisite relevant experience.
3. Confirm specialization or specific subject matter experience to identify the degree of expertise necessary to manage the risks inherent in all businesses. If the sponsors of an oil and gas fund are attorneys or investment bankers, there is likely to be a lack of relevant and necessary operating expertise. They may have been involved in the oil and gas finance for a decade, and they may know intimately all the right players in the industry, but they have earned their living in other positions and their mistakes have not been made as principals in the industry.

Instinct. The natural ability that helps you decide what to do or how to act without protracted contemplation defines instinct. Instinct helps each of us recognize and react to circumstances that endanger our well-being or support our desires. It allows us to assess risk and opportunity. We are all capable of assessing people or circumstances in micro-seconds. Trust your instinct because it is your first, oldest and most important method of self-preservation.

If the reward seems outsized relative to the risk, trust your intuition and look deeper. If you sense that the story is “too good to be true”, trust your instinct and look much deeper. If the investment partner’s behavior doesn’t adhere to your sense of integrity, then find another investment. By staying true to these simple principles, the amount of misfortune you avoid far outweighs the great opportunities you miss.

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To learn more about the possibility of earning long-term, reliable cash flow with Headwater Capital, contact me at RAKantor@HeadwaterCapital.com.