1. From the perspective of information, investment
differs from intuitive understanding in that investors do not often deal directly with money. In fact, the most interaction with investors is information. In investment activities, investors make various judgments based on information, and a small part of these judgments become investment decisions. The amount of investment will only affect the size of the gain or loss, but what affects the success or failure of the investment is the acquisition, processing and analysis of information. "Stock God" Warren Buffett once said: My job is to read. Howard Marks, the author of "The Most Important Thing to Invest," clearly pointed out that investors essentially have only two advantages-information advantage or analytical advantage.
drove the author to use the National Day holiday in 2020 to write this group of articles, because there are too many words on the market to talk about the "way" of investment, and too few words about the "technique" of investment. For investment, the most important thing is definitely "Tao", but without the support of "Skill", "Tao" will become a castle in the air. The author and the investment institution he works for are fans of "value investing", but they cannot make good investments based on the principles and ideas of value investing alone. The nature of investment work is more like the craftsman's handiwork rather than the theoretical research of scientists.
In the 1960s, Japanese auto companies represented by Toyota overtook American auto companies, relying on "continuous improvement." Disruptive innovation is always difficult, but incremental improvement can continue. For investors, how to improve the dimension and quality of information obtained, how to make a proper understanding in the complicated and contradictory information, and how to make judgments in the case of insufficient information, can all be continuously cultivated and refined of.
This group of articles focuses on the "technique" of early investment-how to deal with information well. In the project investment process of investment institutions, due diligence and judgment are closely related to information acquisition, processing and judgment. This group of articles mainly discusses the due diligence and judgment of early investment. This article starts with due diligence.
2. What is a good due diligence?
Due Diligence ("Due Diligence" or "DD") is an important part of the investment process of investment institutions. Due diligence mainly includes business due diligence, financial due diligence and legal due diligence. For early-stage investments, the proportion of business due diligence is very high, so this article focuses on business due diligence. What is the goal of
due diligence? This is the first issue that needs to be considered. The author believes that there are two main ones: verify the authenticity and comprehensiveness of the information obtained in the early stage; obtain and process information for the analysis of the investment value and risk of the project. Based on this goal, a good due diligence should consist of the following elements:
good due diligence = problem awareness + sufficient information + scientific thinking + rational thinking
1. Problem awareness
Problem awareness is the core issue of the project that needs to be repeatedly and carefully considered during the due diligence process. The core issues of different projects are quite different. Some are to verify the key information obtained in the early stage, some to verify whether the investment value of the project is established, some to discover the potential risks of the project, and some to study the competitive landscape of the industry...
Due to various factors, due diligence is difficult to cover everything, so it must be focused. Problem awareness can guide the key direction of due diligence. From this perspective, due diligence and judgment are inseparable. The lack of due diligence of problem awareness is likely to be superficial, and the support for later investment judgments is insufficient. Therefore, in the busy due diligence work, project personnel must always remind themselves which core questions to find answers to; investment institutions should ask project personnel to sort out the core issues of due diligence before due diligence, and be targeted after due diligence is completed To answer it.
2. Adequate information
In due diligence, the importance of adequate access to information cannot be overemphasized. But to do this is not easy, and it is affected by many factors. The information obtained in due diligence is generally divided into two categories: the information provided by the project party and the information obtained independently by the investment institution. The former is mainly information about the company itself, and the latter is mainly industry information. The decisive factor for obtaining the former type of information is the cooperation and integrity of the enterprise side, while the latter is the industry accumulation of the investor.
Early-stage project investment has many disadvantages, but generally speaking, the cooperation and credibility of start-up enterprises are relatively good, which is conducive to the information acquisition of investment institutions. However, the business side may still be due to financingUrgency, to provide misleading and one-sided information. There are two very practical methods to verify the information provided by the enterprise-multi-source cross-validation and long-term tracking. Multi-source cross-validation refers to the cross-validation of interview information with written information and information between different interviewees, especially for more critical information, there must be multiple sources of information. Long-term tracking is a long-term tracking and visit to the enterprise, paying attention to the consistency of the time sequence of the information provided by the enterprise. However, no matter what method is used, the premise is that the founder of the company is a person of integrity. For this, pay more attention and observe more details. Once the founder's integrity is found to be problematic, due diligence should stop. In the acquisition of early investment information, what is more critical is the industry accumulation of investment institutions. The investment organization I work for has defined an industrial investment organization: an investment organization with industry knowledge and resources. It can be said that early investment institutions must be industrial investment institutions. Industry accumulation is a slow effort, ranging from a few years to a long period of more than ten years. It also requires a huge investment of time, energy and resources, which extremely test the background and patience of investors. If you want to rise to the entire investment organization, this organization must be a long-term institution.
3. Scientific thinking
is only one aspect of good due diligence, obtaining a lot of effective information with problem awareness. On the other hand, it is the processing of information. Because of the different sources of information, uneven quality, both signals and noise, and the lack of logical relationships between each other, the first-hand information is only "data", which has yet to be processed into information that can support investment judgments. In order to process information well, investors need two handy tools in their toolbox-scientific thinking and rational thinking.
Regarding what scientific thinking is, science writer Wang Jie has compiled fifteen key points:
(1) can distinguish facts and opinions;
(2) understand the difference between science and technology;
(3) know what information sources are;
(4) Can roughly determine the reliability of the information source;
(5) can see phenomena from a statistical perspective;
(6) can distinguish sequence and causality;
(7) can distinguish causality and correlation;
(8) Understand the basic rules of logic;
(9) know what analogy is and what is logical deduction;
(10) understand the basic concepts of who advocates and who provides evidence;
(11) understand what is going on in the scientific community;
(12) can Distinguish between philosophical speculation and scientific thinking;
(13) can understand that experience is not equal to the law;
(14) knows the meaning of large-sample double-blind controlled experiments;
(15) can judge whether an opinion is falsifiable. These fifteen points of
will be more or less involved in the diligence. For example, the concept of a scientific community helps us to think about whether the technological route chosen by startups will become mainstream in the future. Compared with analyzing the advantages and disadvantages of the technological route itself, a more effective way is to look at the choices of major industry companies. direction.
Objectively speaking, scientific thinking is counter-intuitive, so people are always unavoidable to make mistakes in this area. However, it is relatively easy to master scientific thinking compared to the anti-human rational thinking discussed later. Investors should pay attention to training themselves in this area from time to time, while maintaining a rigorous and humble attitude. From the author's experience, the most common error caused by lack of scientific thinking in due diligence is the lack of discrimination of information from enterprises. For the information provided by the enterprise, you must always use a skeptical eye-is it highly subjective? Are you providing facts or opinions? Is it logically rigorous? Is there a solid factual basis? Can the current development trend be extrapolated linearly?
This article is here first, and the next article focuses on the most difficult point in the next due diligence-rational thinking.
