Tobin Arthur • June 24, 2019

One of the challenging and most intellectually interesting elements of building AngelMD is the goal of turning early stage investing into a legitimate asset. Today, early stage angel and venture investing are rife with vestiges of an analog world in which we “guess” — with varying degrees of rigor — what startup has the most promise. This process is evolving in the digital age.

As we work toward a more efficient and effective world of early stage investing, the AngelMD team leverages wisdom and models with proven success in the public market world. Not every aspect of public market investing has a corollary in the private investing world, but there are plenty that do.

This past week I was listening to an interview on The Investors Podcast with Bill Miller. Bill is most well known for his lengthy and incredible track record at Legg Mason Capital Management and he is now investing under his own firm name – Miller Value Partners. Bill shared a lot of interesting things in the interview, but there were two I felt worthy of highlighting.

The first idea was that returns absent volatility are a myth. Bill shared the sentiment of Charlie Munger relative to volatility in the 2008 crash

“If you weren’t down 40% in 2008, you probably didn’t know what you were doing.”

Charlie has a very dry sense of humor and this idea is not likely meant literally…but close. Miller notes the importance of volatility as an intrinsic part of investing by advising that anyone not comfortable with volatility should consider sitting on cash.

It’s easy to shrug off the idea of volatility, but we all have to ask ourselves two questions:

  • Am I comfortable with volatility? 
  • If so, how much? 

The answers to these questions are informative about the type of investing that each of us should pursue. There is no right or wrong answer because everyone has a different tolerance and different goals.

The second idea I thought worth sharing was that there are essentially 3 types of advantage that one can have when investing:

  1. Informational
  2. Analytical
  3. Behavioral

The first two are related. When we invest in anything, we believe we either have better information than “the market” or that our analysis of the same information available to everyone is superior.

This all assumes that we believe the market is efficient. An efficient market ensures that prices reach equilibrium as information is available. For example, by the time a report on Walmart comes out in the WSJ, we can assume that the information on the company has resulted in any necessary price adjustment because the flow of information is efficient and investors will make rational decisions most of the time. 

Note: One of the objectives of the AngelMD platform is to help members get better access to information and make more informed investment decisions.

An analytical edge means you look at things differently (and hopefully more accurately) than the market. Miller offered the example of Amazon. While most of the market was complaining that Amazon hadn’t generated profits for its first 15+ years, Miller understood that value was being created outside of standard GAAP model. He went long on Amazon and was rewarded.

He also shared the example of Telecommunications, Inc. John Malone ran this company for 25 years during which it never declared a profit. However, if you had invested $1 at the outset of that run, you would have earned $900 by the end. In other words, even GAAP-based accounting metrics are only a piece of the equation.

The behavioral advantage in investing is a topic that has received a lot of attention from sophisticated investors over the years. In a future post I will cobble together a review of some of the best books on the topic, but here are two to get you started:

I share Miller’s thoughts on volatility and investing advantages so that we can focus on how these influence our success in private investing. Obviously we need to be comfortable with volatility. Across a portfolio of early stage investments you will have complete write-offs on at least 50% of the companies. The focus needs to be on the ones with the potential to cross the finish line.

Next, you have to ask what advantages you have when making these investments. Do you have access to information not yet available to the broader market? Do you have expertise that enables you to evaluate certain types of companies more effectively that most?

We’re eager to hear your own ideas on creating an edge. If you have some, please post them on your AngelMD news feed or via Twitter. We’re looking forward to the discussion.


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