Adam Grant is not an investor. But, that didn’t stop him from making one of the biggest mistakes of omission in his life. Adam’s actual day job is as a professor of Psychology at the prestigious, Wharton School of Business at the University of Pennsylvania. Adam’s also a best-selling author twice over, and a contributor to the New York Times. So … what was his gaff?
There’s a secret perk about being a graduate school professor. Every once in a while, you have a couple of bright students coming to you to pitch you an idea for a business and ask you for some investment money. I don’t know how frequently this actually happens at big name schools, but let’s just say it’s happened enough times that there a few lucky professors out there who no longer have to worry about saving for retirement. Anyways, back to Adam Grant and his big mistake. Similar to that of David Cheriton investing in Larry Page and Sergey Brin, Adam Grant was asked by three of his students to invest in their new e-commerce company. But based on the fact that the students waited till the last possible moment to launch their website, and that all three of them had backup jobs lined up, Adam determined that his students weren’t very serious about this endeavor and so he decided to pass on the investment.
Fast forward to today, and that little fledgling of an e-commerce company is now called Warby Parker, the number one place to buy trendy looking glasses online, with an estimated valuation north of $1B. Adam Grant missed out big time. I’m not sure what kind of deal Adam was offered, but it’s probably fair to assume he’s at least $5M further away from retirement. Or, in Adam’s own words, “Now my wife handles our investments.”
But Adam’s big mistake isn’t the point of this story; rather, it’s more like the inspiration. Because after Adam got left behind on the Warby Parker deal, he questioned why he had overlooked his students. Why had all of Adam’s red flags led him astray? Where did he go wrong? Those questions then became the driving inquiry of his most recent book, Originals: How Non-Conformists Move the World.
What Adam discovered in writing Originals eventually answered the questions he had about why he passed on perhaps the greatest investment opportunity of his life. And thankfully, there are also some tremendous takeaways for the rest of us. Namely, why original thinkers don’t actually have to be “first”, why fear and doubt help inspire original thought, and why it’s necessary to have a lot of bad ideas in order to actually get to the good ones.
Why you don’t actually have to be the first
So what does it even look like, to be an “original investor”? Because in some sense, all investors are after the same goal: consistently “good” returns on invested capital. And while sharing a common goal might initially seem like a constraint for producing original thought, some fields like experimental physics don’t even have an end goal. It’s undefined, which arguably makes achieving some desired outcome harder. So at least in investing you have some direction in place to focus your mind from overwhelming information and stimuli.
Being an original thinker in investing doesn’t mean you have to redefine the goals of investing; it just means you might arrive at those goals differently from your peers. As Adam discovered in his research, being original doesn’t necessarily mean you’re the first person to do something. There’s a whole lot of value found in simply improving upon existing ideas.
Think about all the hype around initial public offerings. By the time a company finally has an IPO, eager investors who buy up those initial shares are usually far from being the “first”. Unless for some reason, the company was entirely self-funded all the way to the public offering, most companies raise at least some capital to finance operations and growth. Value investors know this of course, and largely ignore being the first to buy when companies go public. In a big IPO, speculation typically drives the price for the company up, meaning those early bird investors will probably pay more than a fair price.
So if you’re not the first to invest in a company, being an original thinking investor means you at least need your own strategy, right? Wrong. Possibly the greatest investor in history, Warren Buffett has based his entire career on the ideas of another, Benjamin Graham. Buffett often credits Graham for laying all the foundational groundwork for the style of investing that he still practices today. What’s “original” about the way Buffett has used Graham’s methodology of finding value stocks, is really one subtle difference. Graham used to say, “I look for a fair company at a terrific price.” Buffett and Munger simply switched this. They, “Look for a terrific companies at fair prices.” That slight improvement was enough.
Originals are full of fear and doubt
Rupal Bhansali is the Chief Investment Officer for Ariel Investment’s international and global strategies fund. In our interview with Rupal, she shares with us her thoughts on what it means to be an independent thinker, at how she uses this idea of doubt to factor in unforeseen risk:
We like to think of ourselves as independent thinkers. But in this environment where a lot of people tend to act as lemmings in the market, it makes us contrarian. The way in which we approach investing which is quite different from many others out there is that many investors start their investment process with screening. And in their screening process, they screen in ideas that fit. Our approach is the opposite. We screen out ideas. We sort of say let’s reject. We don’t accept. Psychologically that creates a notion of the idea must compete for our attention because we tell the idea, you don’t quite stack up. You’re not good enough for us. Now, tell us why you are. From the very get-go in our investment approach, we are trying to eliminate rather than select.
One of the studies that Adam references in his book, is the research done by Michael Housman. In Michael’s work, he found that there was a correlation between workplace performance and the preferred Internet browser a given employee used. Employees who used either Firefox or Chrome (non-default) were evaluated higher and stayed in their positions 15% longer than employees who used Safari or Explorer (default browser). Of course, switching browsers isn’t what increased employee productivity, it was the doubt of the default option that created the curiosity that ultimately led to performance. Or as Rupal says, it’s not about the information, it’s about asking the right questions, it’s about insights.
The battleground is no longer having access to information. That was yesteryear’s investing. Today’s investing in 21st century is about asking the right question. You’re no longer going to be a good database. You’re going to be a good search engine. The answers are there to be found. It’s the right questions to ask. That’s how we differentiate ourselves as well. We’re not looking for information. We’re looking for insights.
Someone who’s naturally fearful and full of doubt might not be the person you want to star in your Broadway musical. But in money management, being fearful leads to original ways of hedging risk. Because once you reach a certain professional level in money management, big mistakes aren’t usually things like accounting errors, they’re the things you never see coming. Which is exactly why Rupal folds unforeseen risk into her strategy at Ariel. For the last time in this post, here are Ariel’s thoughts on doubt:
The third way in which we differentiate ourselves and it manifests itself in the idea generation is we always ask the question not just what can go right but what can go wrong? This is where the notion of what can go right is the way Buffett would think about the quality of the investment proposition, the franchise, the moat, the prospects as Phil Fisher would talk about, the growth prospects, the compounding in the business. That’s what can go right in the business. But then you ask the question which a Benjamin Graham would ask or which perhaps a Sir John Templeton would ask. What can go wrong and is there a margin of safety in what I’m paying in the business or what I’m being asked to pay in the business? And when you tie the two together, our approach to investing is not just looking at the returns of the business but also looking at the risk of the business and where is the intersection point of where the good risk adjusted returns would be is what price do you pay for that so that you’re being paid to take the risks?
(Watch the full conversation in The Manual of Ideas Members Area.)
Over the years, a lot of people have thought about what makes somebody an original thinker. But Adam Grant’s work might be the closest thing we have to breaking down originality into a learnable basket of skills. By redefining “original”, Adam shares that it’s not all about whose first. Originals more often take their time to allow for maximum idea incubation. Being original is about being different and better; it’s about questioning the norm, and asking better questions. It’s not that original thinkers are immune from bad ideas either. Far from it. Perhaps the biggest difference is that originals won’t let a bad idea define them, original thinkers keep going until they find something else that works.
To be fair, I think Adam learned more from his big mistake of omission than he would had he made the investment in Warby Parker. Because otherwise, we might not have Originals, and instead, Adam might be somewhere on a beach. Even Buffett has said that the biggest investing mistakes of his career have all been mistakes of omission. And he’s surprisingly okay with that. He even admits that he’ll probably miss out on more good deals in the future. So to Adam, you and your mistake of omission are in quite good company; here’s hoping more of your original students with billion-dollar ideas stop by your office to ask you to invest.
(Watch Adam’s full TED Talk)