When you are thinking about making an investment, you will find yourself considering three great things: great people, great ideas, and great situations.
How you deal with the three greats will likely determine whether or not your investment is successful.
Let's consider great people first.
Here's a definition for great people: Great people are great people because they habitually win. They are the winners in life.
Observe carefully people who are in the habit of winning. No matter what, they figure out a way to come out on top of a situation. They never let a situation get the better of them.
These people win year after year in situation after situation. Never bet against a winner!
If you ever have the opportunity to invest in a great person, then do so.
People who triumph under the most difficult of circumstances are often people who have developed strong moral and spiritual fiber.
It helps to have a moral compass pointing you in the right direction when the going gets tough.
More important than a great person, however, is a great situation. This is a surprise! Surely it is more important to be a great person than it is to be well situated.
On a personal level, yes, this is true. Certainly, it is important to be a person who expresses the highest and the best.
However, on an impersonal level, life has its own rules. Often people triumph due to circumstances that happen to be going their way.
How does this apply in business? Experience shows that a business that is blessed with good circumstances is more likely to succeed even if that business is being run by a mediocre person.
Why? Because there is nothing worse than running a business that is poorly positioned in the marketplace. The market is brutal. A business that is poorly postioned will often turn in mediocre results even though it is run by a great person.
Note that some businesses are subject to very harsh market conditions. Take the airline industry, for example. So often in the past, the airlines have lost money.
Why? Because airlines have high fixed costs. Basically, a jet engine is an oil burner. That's how they work. A jet burns barrels and barrels of oil hour after hour.
Besides high fixed costs, the airlines also deal with a fickle public. To the public, one airline is the same as another. The passengers will gladly switch airlines (and loyalties) for a better price.
How do the airlines respond to this situation? In the only way they can. They price cut each other to death.
If you are in an industry where you have no choice but to differentiate yourself from your competition by price, you are in a tough industry. Under these circumstances, the competition is cut-throat and it's hard for anyone participating in that industry to make money.
In the past, the airlines have been a perfect example of this. Many airlines have come and gone due to tough competition. When you're an airline, your one major bargaining tool is price.
This is why the airlines have sales 3 or more times a year. This is also why they try so hard to match each other's prices.
The oil business, on the other hand, is very well positioned relative to other businesses. Why? For one thing, the oil companies sell oil to the airlines. Remember. The airlines are oil burners. What's bad for the airlines is good for the oil companies.
In fact, it's not just the airlines that buy oil. It's true of every other industry as well. All industries use oil for things like heating oil and gasoline. If they don't buy it directly, they buy it indirectly.
Take farmers as an example. Farmers put oil in their tractors as gasoline. They put it on their fields as fertilizer. (Commercial fertilizers are made from oil.)
Because every industry uses oil in some form, every season and every situation sees high demand for oil.
High demand is one half of the equation for the success of the oil companies. The other half? Steep barriers to entry.
It's hard to start an oil company.
How many people do you know who have enough money to start an oil company? And if they did have enough money, would they have the expertise and resolve to run such a complex business?
It turns out that the difficulties involved in starting an oil company keep competition very low. The result? A bad oil company makes more money in any given year than a great airline.
It's important to note that the people who work for oil companies are not better people than the people who work for the airlines.
One group of people does not have the right to feel superior to the another group of poeple just because they work in a industry that pays better.
It's their positioning in the marketplace that makes the difference! The oil companies are very well situated. This is not moral superiority, just circumstances.
Remember this! Great businesses are really just great circumstances. Circumstances often overwhelm the people who work under those circumstances. Because of this, businesses that are surrounded by great circumstances are very prone to being successful--in spite of the people running them as much as because of them.
What's the lesson here?
Remember this rule: You must never invest in a company that is poorly positioned in the marketplace. What is poor positioning? Poor positioning is when your company is a poor competitor in a cut-throat industry.
The things that your company will have to do in order to survive this situation border on being nearly impossible.
The least of the three greats is the great idea. This is very surprising! Surely, nothing could be as important as a great idea.
In theory, this is true. In actual practice, however, the world is full of start-up companies that have great ideas--but have absolutely no business, no customers, and no revenues. This is especially true when the economy is good, and there's lots of money floating around to finance great ideas that aren't so great.
The most important thing to remember about great ideas is that they are ideas and not realities. If a great idea were in actuality a reality, it wouldn't be a great idea--it would be an established fact. Know the difference.
If you are the type of investor who loves companies with great ideas, fine. Just don't put more money in these companies than you can afford to lose.
View your investment in these great-idea companies as an entertainment expense. Invest in great-idea companies to entertain yourself, not to make money.
If you were planning a trip to Las Vegas, you'd budget only so much money for entertainment. Having established a budget, you'd stick with it by gambling away only that amount of money and no more.
Do yourself a favor. Do the same with your great-idea companies.
You are much better off investing in a great person instead of a great idea. You want great people driving your company, not great ideas. Like the great people that run them, great companies win year after year.
Best of all, is to invest in a company that is positioned well in the marketplace. If the business the company is in is a great business, you can leave and go into the wilderness for 25 years, come back, and your money will not only still be there--it will have multiplied.
Of course, the ultimate would be to leverage all three greats: a business in the midst of great circumstances lead by a great person who has great ideas. If you can line up all three, you are there.
But it's rare that all three line up. If you have to pick and choose between the three greats, follow these three rules:
- If you must pick and choose between a great person
and a great idea, go with the great person.
- If you must pick and choose between a great person
and a great situation, go with the great situation.
- Favor great situations first, great people second, and
great ideas a distant third.
It's by looking for great situations first that you eliminate 90 percent of the companies that are not even worth looking into.
Most companies are not worth looking into.
Be kind to yourself and your family. Eliminate most companies as investment vehicles. Stay away.
You would not give financial backing to a 60-year-old man who planned to go to the Olympics and win a gold medal in swimming. You would not care how great a guy everybody says he is. And you certainly would not invest in him just because he has great ideas about swimming.
Think the same way when you go to make an investment. Take a hard look at the situation. If it's a great situation, invest. If not, stay away.
©Edward Abbott 2003-2004