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Over the weekend, I read an article in AARP The Magazine highlighting investment tips from the Shark Tank cast. This magazine is geared toward the 50 and over crowd but the investing lessons seem applicable to investors of all ages, skill levels, and financial means.
Shark Tank, a half-hour business reality show, centers on the pitches of budding entrepreneurs to the sharks (wealthy, business-savvy investors) and the ensuing dialogue. It's entertaining, educational, and nerve wracking. What's fascinating is the decision-making processes of the investors, who may commit money to a venture along with their time, credibility, and business acumen.
Generally, I watch the show from the perspective of the entrepreneur. But, as an investor, it's helpful to consider opportunities from the sharks' points of view. Watching the show from the shark/investor perspective (and reading the magazine article) helped me glean investing wisdom from the Shark Tank cast. Here's what I learned:
Be sure the asking price is reasonable.
Shark Tank investors focus much of their attention on the dollar valuation of the business. Generally, this number is presented at the very beginning of the show. The entrepreneur will say something like, “I am willing to give 20% of my company for $500,000.” Those numbers translate into a valuation of $2.5 million ($500,000 divided by 20%).
The investors then look to see whether the business is worth this valuation. To determine the value, they may consider sales to date, projected sales, and gross margins (entrepreneurs typically reveal the sales price and the cost of their signature products during each segment). The investors may also think about the worth of production and distribution facilities though entrepreneurs on the show may not have acquired significant property, plants, or equipment.
As a side note, sharks may have goals and perspectives that are slightly different than those of regular stock-market investors. They may get involved with their investments whereas regular investors may rely on a company's management to deliver results. For example, one shark may tap marketing channels or business contacts to promote an entrepreneur's product and another may offer guidance on scaling operations to meet customer demand.
In addition, Shark Tank cast members can focus on pleasing the customer while regular investors must trust executives who may try to please multiple stakeholders that include the customer as well as employees, citizens of the communities in which they operate, boards of directors, and shareholders. That's not to say that the work of Shark Tank investors is easy; but it can be different from other types of investing.
Still, the take-away concept here is that valuation matters. Shark Tank investors seek to confirm that the price they are paying for an ownership stake is worth their trouble.
Invest in companies with economic moats.
One of the key elements that the Shark Tank cast members zero in on is the uniqueness of the product or service being pitched. They seem to be looking for an economic moat or the foundation for one.
For example, the investors may ask if a product is patented or inquire about competitive activity. They tend to move toward businesses with unique offerings and delivery systems while staying away from ones that can be duplicated easily by a competitor. Sure, a cool story told by the entrepreneur can be a springboard for getting attention but generally there needs to be a unique value proposition on the table.
Interestingly, though, the sharks' acumen often serves as an economic moat. Their cash infusions and expertise can help stave away competitors as they get entrepreneurs' visions in front of as many customers as practical.
Shark Tank cast member Kevin O'Leary suggests having 10% of an investment portfolio in cash. (I recently wrote about upping my cash holdings.)
In a similar vein, Mark Cuban recommends not investing as a preferred alternative to investing in a bad deal. From my perspective, that advice translates into holding cash if you can't find an investment that meets your criteria.
Don't lose money.
O'Leary says that he focuses on return of capital before even considering return on capital. That is, he wants to make sure that he won't lose money on an investment deal; then he thinks about how he might make money through investment earnings.
This lesson reminds me of billionaire Warren Buffett's two rules of investing:
- Rule No.1 is never lose money.
- Rule No.2 is never forget rule number one.
This advice sounds simplistic on the one hand and difficult to achieve on the other. Sure, you can put your money in a savings account or savings bond and avoid putting your investment principal at risk. But Buffett and O'Leary didn't get rich by putting their money in a savings account. Nevertheless, they emphasize a focus on preserving principal and not losing money.
Here's my take on the don't-lose-money advice: Consider avoiding huge risks thinking you'll have a shot at great returns simply because risk and return are negatively correlated (that is, low risk translates to a low return; high risk can yield a high return). Consider elimininating (or more realistically, reducing) risk by carefully choosing the businesses in which you invest and refusing to pay too much for an investment. By not losing money on your investments (or controlling those losses), you can more readily enjoy any gains that you experience.
On a personal note, I've learned that it's easy to make money and easy to lose money in the stock market. The lesson for me is that I should learn to invest in a way that minimizes the downside and allows top performers to produce growth in my net worth, not simply hope for a runaway success to overpower losses.
Stick with dividend-paying and interest-bearing investments.
This tip comes from O'Leary who learned from his mom. According to their philosophies, investments should always generate cash (not simply capital gains when you sell the investments).
As a result, O'Leary suggests buying dividend-paying stocks and interest-bearing bonds, which both produce income for their owners.
Learn from mistakes.
One way to become a better businessperson and investor is to learn from mistakes, according to Robert Herjavec.
Learning from mistakes can be difficult. You need to own up to the mistake and consider decision-making processes that led to the mistake. Next, you've got to figure out the lesson you ought to learn; this step can be difficult if you're new to entrepreneurship or investing. One approach is to recognize any shortcuts you took in making a decision and another is to consider whether you took investment advice that was not trustworthy.
As a plodding learner myself, I may not figure out exactly what course of action I should have taken. But typically I can learn what NOT to do next time.
The sharks of the Shark Tank cast offer fascinating lessons. You may be able to learn from them by viewing the show from an investor's perspective — even as you are rooting for the underdog entrepreneurs to become successful.
Updated: July 6, 2016
What have you learned by watching Shark Tank?