Warren Buffet is purported to have provided the following sage advice:
"Invest in what you understand...don't go outside your circle of confidence."
With this in mind, consider two starkly different business plans I had the pleasure of reviewing. Plan A was written by a fully licensed and educated professional. Plan B was written by a licensed fisherman, educated primarily by experience.
Plan A, from the professional:
Purpose: to finance the purchase of a $250,000 luxury asset, with (arguably) a business purpose in mind. The loan request was supported by a 100+ page, 3-colour, glossy, professionally bound business plan, with a complex tax rebate scheme pre-approved by Revenue Canada. And get this. The professional handed me, (with a condescending smirk) a 3x4 foot scroll of paper with a mind-boggling multi-colour, plotter-printed flow chart detailing the project from start to finish. I unrolled it on my desk, and gaped at the complex series of transactions, listened to his detailed explanation and eventually grasped the gist of it - sort of.
Plan B, from the fisherman:
Purpose: $100,000 to finance a quadrupling of his fishing gear in keeping with a robust year in an unregulated species fishery. There was no glossy presentation. It was written on a torn piece of yellow foolscap -- pencilled out for me over a meal of fish & chips. The numbers added up nicely, and it made perfect sense.
There was something refreshing in the fisherman's straight forward approach to logic. Turning that equipment into cash was clearly visible. On the other hand, after speaking with the professional, I once thought: "Why do I feel like I need to wash my hands?" His plans weren't just complex. They seemed more prepared to obscure the truth than to clarify it.
All of this has broad application to investing. Here are some simple guidelines which can help with either investment choices or loan requests:
A good idea stands on its own merits. There is no requirement for a pretty girl to wear thick make-up to get a date (gender-equality moment... nor for a handsome young man to drive a fancy car).
Never be too shy to say: "I don't get it. Help me understand."
A bad idea is still a bad idea if it is written on glossy 3-colour paper, embellished with multiple charts and graphs, and reams of data. My experience has repeatedly shown an inverse relationship between the sheen of the paper on the business plan and the quality of the information in it.
If the concept is truly complex, break it into its simplest parts and explain it to a 10-year old. He or she will either say: "Cool!" or something like... "I don't get it."
LISTEN TO YOUR GUT FEELINGS. Those feelings may simply be evidence that the human mind can take in and digest much more than we have learned to articulate.
Great ideas are best executed by someone with mastery or at least a developing proficiency in them. They've weeded out most of the start-up risks already.
Buffet also taught: "Most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising 'Take two aspirins'?
