One of our principles at Bluestone is that business and investing are two sides of the same coin. As an entrepreneur you are an owner-operator: you a provider of capital (owner) AND you are management (operator). We see investing as the same thing - the only difference is that someone else is doing the management part.
The key activities for being an entrepreneur or investor are the same:
Find attractive potential outcomes
Find a way to stack the odds in your favor
Minimize loss if things don't work out
Find attractive potential outcomes = find good or great opportunities. That means different things to different entrepreneurs and investors but the idea is the same, whether it's a business with high growth potential; or a market that's underserved; or a business that's poorly managed and needs some TLC. The point is that the future could be different and there's an identified path to get there.
Find a way to get the odds in your favor = requires an honest appraisal of the path ahead and the factors likely to be favorable or unfavorable. Sometimes these are outside our control (e.g., industry trend) and sometimes they are within our control (e.g., management experience). We seek situations where we find more favorable factors that are within our control. In doing so we improve the probability of successful outcomes.
But what if things don't work out the way we expect? Even when the odds are in our favor there's still some chance that things don't go our way. That's business. The global economy in which we operate is a complex, dynamic, adaptive system - and can change in unpredictable ways. Management teams don't always gel the way we expect. We can't predict but we can prepare. Finding ways to minimize loss is a critical part of entrepreneurship AND investing, allowing us to live to fight another day.
Here's a great example of these objectives in action. It's a quote from an investment team about how they approached an investment in the shipping industry (bold type is our commentary):
"The global shipping market is subject to extreme cyclical swings. Due to institutional imperatives, public market constraints and misalignment of interest, we have not believed that investing in the sector's public equities is the best way to take advantage of these cycles. We prefer the contrarian approach of buying vessels at below replacement cost, operating with minimal leverage, and exiting when values incent new vessel construction (all of which helps to minimize loss if things don’t work out)…In response to depressed container ship values in 2013 (offering a potentially attractive opportunity), we began to make direct ship investments in partnership with industry operators. Because [investment vehicle] invests directly in shipping and service vessels, and we control the equity of [investment vehicle], we make the purchase/sale and capital distribution decisions (improving the odds of success), positioning us to buy at attractive prices, finance conservatively, and exit opportunistically."(1)
Of course, in 2021/22 the global economy rebounded from pandemic lows. Lack of investment in new vessels for many years left supply at low levels relative to surging demand (feeding into the familiar "supply chain disruption" headlines). Shipping prices jumped. And the investor exited the investment in 2022.
The recipe of attractive potential + favorable odds + minimize loss - along with a pinch of patience for this almost 10-year time horizon - ultimately led to an excellent outcome. But even if shipping had never recovered, the approach to the opportunity meant that the chances of losing money were low.
Entrepreneur. Investor. More similarities than you think. In fact, two sides of the same coin.
FPA Hawkeye Fund Second Quarter 2022 Commentary