Tren Griffin writes extensively on investing and he is well worth reading. He studies the best investors and then summaries what he’s learned from them. He provides “Cliff Notes” from his research saving us a great deal of time.
Tren tweeted the following back in January:
“Best investments are not available to the general market & its unlikely that a party on the other side of the transaction is better informed.“
I saved the tweet because I believe he is 100% correct.
The best investments are not available on the general market. They simply aren’t and this is because these investments get acquired before they go to the general market. Just think about Uber. As I write this Uber stock isn’t available on the general market. It’s still a private company until the IPO.
When the stock does become available on the general market through the IPO, many of the best investors will actually be selling their shares of Uber stock. They extracted significant profit BEFORE the shares become available.
I actually found the 2nd part of his tweet to be more interesting.
The best investments are investments where you know more than the person on the other side of the transaction. The knowledge and experience you have create the better investment.
When you and I buy shares of Uber at the IPO, we’re buying our shares from a seller who is better informed and this puts us at a disadvantage.
Another example might be real estate…
Let’s say you stumble across an income property offered for sale by someone living 1,500 miles away. Let’s also assume this seller inherited the property and really doesn’t know your local real estate market. This particular property may be a great investment for you and this is because the seller isn’t as informed as you are regarding the value for this particular property.
You’re better informed and this creates a great investment opportunity for YOU. (This may not create a great investment opportunity for someone else and this is because they may not be as informed as you are regarding your local real estate market.)
This line of thinking suggests we focus our investment efforts in areas where we are better informed.
Most people have a significant portion of their money invested into the stock market where the average person is definitely not better informed. The average investor does not know the true value of companies they invest in and because they don’t know how to determine value of the business, they’re at a significant disadvantage.
Warren Buffett does know how to value a business. He can see great investment opportunities very quickly and this is why Berkshire Hathaway owns dozens of great investments. He was the better informed person in the transaction. Moreover, Buffett won’t invest if he isn’t better informed. He has historically avoided “tech” businesses and this is because he cannot accurately value them.
He simply avoids them completely. He doesn’t want to play a game he can’t win.
In other words, Buffett knows his investment is a great one BEFORE he invests.
All of this begs the question:
Where are you better informed? In what area do you have more knowledge and experience than the party on the other side of the transaction?
Focus your investments in this particular area.
And if you’re not better informed in any area, you should consider getting better informed.