Fritz Demopoulos (CEO of Queen’s Road Capital) laid his cards on the table at the WIT Japan & North Asia Bootcamp, with a crash course on what any successful investor needs to think about when stepping into the marketplace.
Take your time to do your research
Before making any decisions on a particular company, do your research thoroughly and carefully.
Speak to multiple high potential companies existing within the same industry to build confidence when making your choice. Neglecting to do so could mean missing out on a better opportunity.
An obvious but perhaps easily overlooked aspect of being an effective investor is making sure that you are up-to-date and well aware of market trends in the respective industries of interest to you.
Demopoulos suggested monitoring and reading research reports by credible equity analysts; this could provide expert perspectives based on a wealth of industry data.
Take advantage of these resources as they provide plenty of background information to help identify companies with potential, resulting in wiser investment decisions.
Get a deep, but also broad understanding of more than one industry
While an in-depth knowledge of a particular industry is critical to making smart investment choices, too narrow a focus can also be a hindrance.
“There is a synergy of knowledge, relationships and experience by investing in more than one company in the travel industry,” said Demopoulos, “you can’t just invest in one industry... Without [broader] perspective, [you’re] going to make some mistakes and [you’re] not going to learn.”
Familiarise yourself with other industries and, if possible, make multiple investments in each to expand opportunities for innovation. Following the philosophy that the whole is greater than the sum of its parts, Demopoulos said that to be a good but also innovative investor, “combining ideas from different industries” is a powerful strategy.
Investors must think critically and make a habit of questioning everything. Try to understand what makes different businesses so successful. “Many times, it isn’t the obvious answer,” highlighted Demopoulos. For example, Google he claims isn’t successful because of their search algorithm. It’s something else.
Think outside the box, question your own perspective
It is all too simple to blindly follow a wave of market trends without fundamentally understanding why things are the way they are.
Simply challenging conventional wisdom has value, but self-evaluation is also highly important.
Understanding who you are as an investor can provide insight into your own decision-making methods, where your strengths lie and what your limits may be.
Demopoulos suggested assessing who you socialise with. Are they younger or older? What perspectives do they bring? By diversifying your social circles, you will invite fresh ideas that can help you think differently.
Evaluate your position as an investor (eg are you an industry insider or a newbie? How did this opportunity present itself to you? Were you lucky or are you a trusted character?) By cultivating this understanding, you can nurture your deal flow (ie the rate at which investors receive business proposals and offers).
The key is to stay open-minded and develop your own interpersonal skills. Cultivating trust and a chemistry between yourself and future business partners is central to maintaining a good business relationship.
“Industry veterans are jaded [and] closed-minded,” said Demopoulos, “amazing companies somehow slip through and provide opportunity for the rest of us.”
Assess every opportunity with great scrutiny
Investors must ask themselves whether or not they are truly effective in assessing if particular investments will likely yield major returns.
Demopoulos pointed out that competition amongst investors is often very high as each fight to get involved in the “hottest deals”.
“For us to be competitive, we also need to have that kind of scale and deal flow”, he said. However, investors must be careful not to sacrifice how thoroughly companies are assessed to maintain a high flow.
As larger investment firms are faced with countless business pitches every day, finding a strategic method to evaluate each adequately is crucially important.
For example, to evaluate whether a product is genuinely as good as an entrepreneur claims it to be, develop measures to quantify it. “Hire people to test the product, play with it, measure whether it really is any good.”
Evaluate the people, not just the business model
While a pitched business model may seem bullet proof, the people running the company absolutely cannot be overlooked as they have a direct influence in the evolution, success and growth of the company.
Demopoulos laid out his “20-hour rule” wherein he argues that to get an accurate assessment of key individuals in a company, you must spend at least 20 hours with them.
While difficult to achieve (especially when coupled with a high deal flow), he noted that shortcuts could be taken by applying ‘filters’ like educational background or employment history to make the process more efficient, but it isn’t advisable to do so.
Filters can often be misleading to investors. “We live in a dynamic environment. Things change all the time… the only way to really assess is by spending time with them.”
Key characteristics to look out for
Be wary of individuals who simply whisper sweet nothings and empty promises into investors’ ears. Contrary to popular belief, “some of the biggest mistakes are when interpersonal skills are too smooth,” notes Demopoulos.
In fact, individuals that are willing to argue for and defend their product are far more favourable as it implies independent thinking. However, they must also listen. “We want entrepreneurs to be self-aware, to understand their own weaknesses.”
Drawing a parallel with Moore’s law (which states that every 18 months, the processing power of a transistor doubles), Demopoulos said that “knowledge in a start-up doubles too… do founders have the ability to take that data, learn and make a difference?”
To state the obvious, commitment is also vitally important. Gauging how invested someone is in their own business can tell you a lot about how it is run. Demopoulos spoke about the importance of entrepreneurs having their own “skin in the game”; a personal stake in whether the idea succeeds or fails.
A sense that the opportunity is as important to the entrepreneur as it is to them is extremely important. “People have to feel the pain” if things go wrong.
Additionally, consider whether founders have the leadership and vision to hire and lead talent, especially in the face of limited resources and huge constraints. “Do they have the leadership, vision and interpersonal skills to get those key talents to come in and join them?”
Patience, market timing and price
“You need a philosophical mindset” when approaching deals, advised Demopoulos. A rush to secure any seemingly promising deals can result in reckless decision-making.
Don’t just invest capital, but invest time in properly conducting reference checks, due diligence and other necessary procedures before making an offer or closing a deal.
Also, pace your investments. Studies and data collected from high investment markets suggest that steadily pacing investments generally lead to the best returns, in spite of a market’s movements.
Applying Warren Buffet’s principle of ‘dollar-cost averaging’, Demopoulos advocates a steady approach to investing. While “price does have some relevance, it’s important to have a very consistent tempo in how we allocate capital.”
