25 Oct 2015

The One Killer Question You Must Ask Before You Make a Major Investment Decision

Adam Geha

25 Oct 2015

positioner

Einstein once famously remarked: “If I had an hour to solve a problem and my life depended on the solution, I would spend the first 55 minutes determining the proper question to ask.”

And while investment managers (thankfully) don’t deal in matters of life and death, as I like to say: “We operate on number 3”. There’s your health (1 or 2) and the well-being of your family (1 or 2) and then there’s your life savings (3).

So it’s critical that investment managers get their questions right when deciding which deals to do and which to let go. And over the years, I’ve found that nothing concentrates the mind better than asking this simple question: “Would you invest your parents’ money in this deal?”

Not your money – but your parents’ money.

Why? Because some individuals may be risk-taking or even reckless with their own money, but very few people I’ve found are prepared to be reckless with their parents’ money. If they are, they shouldn’t be working in the funds management industry (or any other industry for that matter).

The cynics will decry it as a platitude – or worse still, propaganda – but I’m proud to say that not a single investment decision is made at EG without us posing this simple question to each member of our internal investment committee: “Would you put your parents’ money in this deal?”

I recommend you ask your colleagues this simple question the next time you’re confronted with a major investment decision – and then listen carefully.

Listen not only to what is being said (the primary soundtrack) but also to the pauses and qualifications (the secondary soundtrack). If the response is not a relaxed, unqualified affirmative – then you should be worried.

Deal leaders have an all too human tendency to become attached to a deal they are working on, and the longer they work on it the deeper the attachment grows (this is known in the investment literature as “accelerated commitment”).

The best way to counteract this investment bias is to ask the deal leader (and everyone else in the room) to step outside of their desire to do a deal and consider the welfare of someone they care deeply about (their parents).

To make sure the team understands that the stakes are high, remind everyone at the start of the vote that their individual opinions will be recorded and will be reviewed when their investment is ultimately realised.

Here are some replies and rationalisations to the “killer question” that I’ve heard over the years, which I’ve learned through experience to be very wary of:

– “I wouldn’t buy this for my family, but for this fund ‘yes’ – because this fund has a very narrowly defined Investment strategy and this deal fits it perfectly.”

– “Well my parents are very conservative, so no I wouldn’t put them in this deal but this fund has a different risk-return profile.”

– “It’s very hard to say because my family doesn’t have $400 million to invest.”

– “I could see myself investing my parents’ money in this deal as part of building a diversified portfolio.”

It’s not that these reasons are invalid per se, but rather that we often hide behind these reasons when we have serious reservations about a deal. Incidentally, watch out for that dastardly “d word” (diversification) because it so often is the refuge of the confused mind. Diversification is a legitimate secondary motivation for doing a deal but beware when it is used as a primary justification for an investment decision.

So there it is – it sounds a little sentimental and quaintly old fashioned I know – but make it a habit to ask everyone in your team whether they would invest their parents’ money in the deal. And if the deal leader pauses, qualifies or squirms in their seat – leave the deal alone, there’ll be a better one round the corner.