My wife and I lost our best friend last May, Günter von Kleist, a German Shepherd Dog (“GSD”). Günter was just eight-and-a-half years old and had developed the canine version of MS. He was in severe pain and had a “lick” sore on his front leg that he had torn down to the tendon. After trying everything to heal the wound, we knew we had to put him to sleep but left that decision to the vet.

We brought him to the vet very early on a sunny morning, and after working one last time on the wound, the vet quietly said, “It’s time folks.” Like everything else in life, Günter was not going down without a fight. He tried to get off the table and struggled with the vet tech until he was slipping into sleep.

Now you are asking: “Why am I reading this?” and “What does this have to do with selecting prospects for investments?” Please be patient and read on.
My wife and I were true empty nesters for the first time in over a half century of marriage. We had always talked about the wonderful trips we would take and adventures to be experienced when we no longer had responsibilities. But now it didn’t seem important. The house was dead, and we had never realized how important our dogs and cats were to making us happy and whole.

So the big decision was made – email the GSD breeder and put our name in for a puppy. The breeder emailed back that a litter was expected in October. Now we were hooked. We sent our deposit immediately so we would be first to choose a male. Then we started worrying. How does one select a puppy that will fill Günter’s big paws? We asked to see the puppies as soon as they were born. The breeder said we could come see them once they were two weeks old. We visited, met the bitch who was very friendly and outgoing, and met eight blind, deaf bundles of hair. We asked to come back, and four weeks later we returned to meet eight little hellions trying to tear down a gate to get outside. I asked the next question: “When confronted with options that all seem acceptable, how do you choose? Eenie, meenie,miney, moe?” The breeder said, “That works as well as anything.” 

That approach, however, does NOT work with investment prospects. Read on.

Now the big day arrives, and it’s decision time. All the way down to the kennel, we kept asking ourselves: “Are we doing the right thing?” After all, these are rambunctious puppies.
The five males were segregated in a pen with different color ribbons placed on their necks, so we could distinguish one from another. One was rejected immediately because he needed to put on more weight before leaving. One just didn’t seem interested in us. We were then told to enter the pen. I picked up one, and he pulled his head back; his look said “Why do you touch me earthling?” Reject. Now we were down to two: the one sporting the red ribbon and the one with the green ribbon. My wife picked up one and then the other. They both responded to her, so she copped out.  Then it was my turn. I picked up “greenie,” and he was okay, then “red.” Smooch, smooch, lick, lick. I declared, “This is the one!”

Now the Smooch Test is a well-proven method for choosing a GSD puppy, but I wouldn’t use that method to select investment prospects.

So let’s perform a thought experiment. Picture a quiet room where we mingle with investment prospects and carry on casual conversations with them, discussing their business plans and aspirations. We begin to notice that the prospects can be separated into two categories: those offering products or services that satisfy wants, and those offering products or services that satisfy needs.

Now wants are those “things” that drive our consumer-oriented economy. Wants are things we don’t need, such as that new cell phone with the larger screen, but items we just have to have because the advertiser says so. Wants come and go quickly, and while there often are big profits to be made, the success of those products or services will depend more on the timing and correct reading of market conditions than on long-term demand for the products or services.

The other prospects are trying to satisfy needs, offering products or services that go to the very heart of our daily lives
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Now it’s due diligence time. We must seek answers to many questions about the prospect, its technology and its market. What is the market size? Who are the key players? What other companies offer competing products? Is there any intellectual property? Does the prospect have “freedom to operate,” i.e., is it stepping on someone else’s toes? Have the founders done this before, and what is their track record? Does the team “mesh” well, and will other talent have to be brought in?
  
I think you are getting the picture. BUT, there is one test that only comes with experience and is something an investor probably has to be born with: an “educated gut.”
While one’s “gut” may guide one to select the “best” puppy, it alone should not be used to select the best investment prospects. One must consider several factors – the sum total of one’s due diligence AND one’s “gut.”

Good luck with your puppy and prospect shopping!

Russell Tweeddale, Managing Director, Investments

 

 

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