My Unfair Advantage

Photo: My Unfair Advantage

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In March, 2020, when the global pandemic set in and the world recoiled into a liquidity crisis, crashing global markets into a free fall - I started looking for ideas.

I knew I was witnessing history, - the kind of history that could make or break a future.

I spent everyday on the phone, grinding my network of big thinkers for insight - What are you doing? Where is the opportunity? Is it time to be aggressive or conservative?

I became obsessed with learning the crisis strategies of the smartest people I knew. When I had exhausted my rolodex, I was still hungry - I started searching for new minds. A fortuitous impact of a global pandemic is that people who were normally hard to reach were now sitting at home, happy to talk.

I connected with Federal Reserve insiders like Danielle Di Martino Booth, lifelong and legendary speculators like Jim Rogers, and world renowned macro investors like Roual Pal. I started recording all of the conversations so I could share them with my network. The surge in video content pushed my Youtube subscribers over 100K. (Youtube sent me a plaque!) It felt like I was back in school again, a full time student.

The strategies I gathered were as diverse as my guests - from Jim Rogers telling me to “buy North Korea” (real advice) to Luke Gromen warning me away from US Dollars, I gleaned the perspectives of some of the world's most respected economists and money managers.

I was searching for the best path forward. The world was reeling. My conference business was on pause, but I knew I was surrounded by opportunity.

I was seeking osmosis. If I could expose myself to as many good ideas as possible - surely I would absorb that which best applied to me. Fortunes are born in crisis - I would be the iron out of the fire.

After sitting down with countless names who have achieved outsized success distributing capital profitably, I uncovered only two common themes:

They have very defined rules. (No surprise)

They don’t break their rules. (Harder to do)

Example - Danielle Di Martino Booth is remarkably bullish on gold and very smart. After decades of profitable decisions, she can trust her conviction. Yet despite her confidence in a rising gold price she doesn’t invest in gold mining stocks.

She has limited experience with the resource business, so she limits her exposure to funds. It is not a risk tolerance issue - she backs early stage companies - but only in select industries she knows well.

She has her rules, and she sticks to them.

Do you have rules? Do you break them?

Each investor I spoke to had different rules, but they were always designed with a similar purpose - to capitalize on a strength, creating an uneven playing field.

Nobody can be great everywhere - but everyone can be great somewhere.

It reminds me of some parenting advice I received - Every kid is born with a winning hand. It’s our job to help them find it.

The neighbour's son may have been dealt a full house, but my kids got a wild card ;)

Find your strengths, and play to them.

I believe the small cap sector is all about the people (No surprise - I broker relationships for a living). I connect companies with investors and investors with opportunities. I run a conference business. I host a weekly interview series.

I am in the people business, 100%.

Without question, I have an unfair advantage when it comes to evaluating the people running a company.

So below are 4 of my rules, built for me. They work very well.

Rule # 1: People Over Everything

I stand by this rule all day. I look at opportunities in every industry - from precious metals to telemedicine. My biggest position this year was actually in an infant nutrition company (we’re up 1300% in 14 months!).

I am not the expert in every industry I deploy capital - but that doesn’t matter. Because I don’t invest in companies, I invest in entrepreneurs.

The infant nutrition business had the right product at the right time. But it was the CEO that convinced me. She is a proven winner, and has earned the conviction to stand behind her values or vision. She has a pattern of being confident, and correct.

To be disciplined with the above rule, you need to have confidence that the people you choose are an undisputed expert in their industry. Unfortunately, this limits your exposure to established entrepreneurs.

I am not opposed to betting on the rookie - most of my life I have been the rookie, soliciting bets. But this is the limitation with the People Over Everything rule - if you can’t have absolute conviction that your entrepreneur is one of the top experts in their industry - then you need to be that expert, and the People Over Everything rule is compromised.

If it is the first rodeo for a young CEO, I need to see them surrounded by a stacked deck of veteran executives, directors and investors that satisfy my criteria.

Make your rules, don’t break them.

You pay a premium for the best names - but I look at it this way - in exchange for that premium, you get some insurance policies. The best names will insure you against egregious G&A. They insure you against poor management decisions. They will insure you against projects with short sighted economics.

In addition they will ensure you are in good company - as the best in the business stick together. Look at the boards of the most successful companies - the directors and advisors are always a stacked deck. It’s not an accident - brilliance attracts brilliance. Smart people pick other smart people.

“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Warren Buffett

Rule # 2: Follow the Smart(est) Money

One day I may be the first mover into a deal, but at this stage in my career, with a few small businesses, three young kids and a mortgage, I’ll let someone else go first. Someone with money to lose... but someone who is very good at not losing it. Again, I lean on my evaluation of “who” the lead investors are to influence my conviction.

I have a list of capital groups and independent investors that I want to see sold on an idea before I take the plunge. It’s not cowardice, it’s caution. It’s money. Every dollar I send to battle needs to bring something home (and not just a lesson!). You can’t win them all, but you can win most, if you are careful, and intentional.

I have a very high risk tolerance - and I am a perpetual optimist. So I create structures to facilitate more critical decision making. I think of my money as if it already belongs to my kids. Instead of asking if I would write a cheque, I ask: Would I take this money from my four year old and send it away? The context helps. It’s kept many dollars in my pocket.

Rule # 3: Assess the Timing

The largest investment I will make in my life will be in the health science sector. I stand by my claim that health science will be the biggest bull market of my lifetime, and one that I am thoroughly passionate about (I will run a marathon on my 150th birthday).

But right now, I am not looking for opportunities that reflect optimization. COVID-19 brought the world to its knees. For many, the worst battles are still to come. The assets in demand for the next 7-10 years are stability and security.

I echo the optimism of Peter Diamandis and Ray Kurzweil - we are moving towards a world of increasing abundance, but there will be bumps along the road.

Governments, corporations and individuals will be desperately seeking means to reduce fragility - so this leads me down the road of hard assets, cash generating assets, and historical / covert stores of wealth.

Being early is not the same as being wrong - but catching a tailwind is better.

“There are no bad ideas, only bad timing.”

Barry Ritholtz

Rule # 4: Understand the Terrain

Sun Tzu, in The Art of War, discusses terrain as a top estimation to understand before risking battle - knowing in advance whether the ground will be traversed with ease or difficulty, open or constricted and the chances of life or death.

I may be sending my dollars to a figurative battle - but money heaven is very real. I love the analogy. In the small cap sector, terrain is the competitive landscape, the jurisdictional risk, and the regulatory environment.

Do you understand the terrain? What battles have been fought here that you can reference? Whether it is a permit for an exploration company or FDA approval for a nutrition product - understand the terrain you are in. - What's the history of projects moving forward here?

"When employing troops it is essential to know beforehand the conditions of the terrain. If he knows the ease or difficulty of traversing the ground he can estimate the advantages.”

Sun Tzu

Why the Discipline? Aren’t The Great’s known for being exceptional risk takers?

Yes - but in the context of a home field advantage. The best investors that we all know - Charlie Munger, Paul Tudor Jones, Carl Icahn, George Soros and of course the Oracle of Omaha, have one thing in common. They only jump if the conditions are perfect. Then they jump in deep - when preparation meets opportunity.

“I didn’t get where I am, going after mediocre opportunities”

Charlie Munger

Tomorrow I am going to show you a company that exceeds the expectations of the above criteria:

This is the most stacked deck I have seen on an executive team this year - The people are proven winners

The cornerstone investors have supported six companies that have touched a $ Billion market capitalization - The money is smart

Macro forces supporting the industry are more favourable than they have ever been, attracting capital from every subset of the financial world - The tailwind is massive

They are positioned in the best jurisdiction, with a consistent track record of expeditiously pushing projects forward - The terrain is incredibly favourable

In addition:

I built my position on the open market, within pennies of today’s share price

There is no cheap stock locked up with retail investors that is coming free trading

The CEO is the largest shareholder and management owns 40% of the company

In the small cap sector, just as in life, there are Drivers, and there are Water Skiers. Look around - Who in your life is setting the course? Who is just along for the ride?

The company I will announce tomorrow is loaded with Drivers - The CEO, the lead investors and the key executives - all have delivered previous exits for their shareholders, some many times over.

Don’t miss tomorrow’s announcement.

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