Missing life-changing opportunities, again and again

How can anyone miss once-in-a-lifetime opportunities? Missing it once is unimaginable. Twice, ludicrous. Thrice, plain stupid.

How about missing it one thousand eight hundred times?

My dentist did exactly that.

His dental practice, built over three decades, is popular and profitable. The wait list to get an appointment is long. His success motivated his sons to be dentists as well. He makes enough for a million-dollar home, country club membership, and private schools for his kids.

These are nothing compared to what he missed.

20 years ago, he attended a farewell party. His cousin’s startup was acquired by Company X. As part of the acquisition, his cousin had to move to Nevada to work for X.

The cousin was a robotics engineer by trade. His startup owned two patents and had no revenue. He was thrilled that X appreciated the intellectual property enough to acquire it. What was better, in his mind, was that 98% of the acquisition price was paid in X’s stock, with more on the way as part of his employment agreement with X. Suffice to say, he was optimistic on X’s prospects.

X is the most amazing company. You all have to buy its stock, the cousin said at the party.

Out of 30 family members present, my dentist was the sole buyer of X’s stock. He had never owned stocks before. He had no idea what a stock is. But he trusted his cousin. X traded at $5 per share then.

As business at the dental practice picked up, my dentist almost forgot about his tiny stake in X. He checked his portfolio bi-annually, if at all.

To his surprise, X increased six-fold after two years. He was thrilled. He had never bought a stock before X, yet his first purchase was wildly profitable. He called the cousin to ask about X.

Everything is going great because of our proprietary advances in precision robotics and biomedical engineering. Do not worry about the litigation matters. You should continue to own X, the cousin said.

My dentist, perplexed by the conversation, promptly sold his stake at $30 per share.

For the next five years, my dentist had conversations about X with his cousin at least once annually, before they lost touch. At every conversation, his cousin touted the milestones at X. Every major regulatory approval, significant purchase order, and successful R&D outcome reinforced the cousin’s confidence in X (These were all public information). At their final meeting before losing touch, my dentist insisted that he was satisfied with the six-fold return, and could do without owning X’s stock.

Shortly after the final meeting, the United States faced its worst financial crisis since the Great Depression.

My dentist felt justified in not owning stocks at all, and perhaps even more justified in selling X’s stock five years earlier.

Fast-forward to 2020. It has been 12 years after the financial crisis, a little over 12 years since the final conversation my dentist had about X with his cousin, 17 years since my dentist sold X at $30 per share, and 19 years since the cousin began working for X and recommended X at $5 per share.

The cousin invited his entire family to a 4-day, all-expense-paid trip at an exclusive ranch in California. The occasion was his retirement. After 19 years of service at X, he retired as a senior executive. Adjusted for stock splits, X was trading near $700 per share.

The cousin never sold a single share of X in his 19 years of employment.

The cousin was wealthy. How wealthy? If he had sold his startup at $1.5 million (estimated, the price was never disclosed), of which 98% was paid in X’s stock, his stake in X would be worth $206 million, a staggering 140-fold return.

And $206 million is the minimum estimate of his stake. Because about 30% of his compensation was paid in stock annually.

My dentist invested $50,000 in X and sold his position for $300,000. Had he held until his cousin retired, his stake would have been worth almost $7 million.

My dentist missed the boat for a 23-fold return ($30 to $700 per share). Not once. Not twice. Arguably for five years (between selling X and losing touch with his cousin), my dentist had direct access to an executive with intimate knowledge of X and keen enthusiasm for the business. Every day in those five years was a chance to buy X again. He missed all of them.

All 1,800 days.

A few takeaways:

1 – Missing life-changing opportunities happens more often than you think.

Between 1952 and 1962, Warren Buffett taught investing at the Municipal University of Omaha (now the University of Nebraska Omaha, or UNO). It was a non-credit class because Buffett disliked giving bad grades.

A photo showed 16 students in Buffett’s class. In 10 years, Buffett perhaps taught 160 students. Guess how many invested with Buffett?

One.

Less than one percent of 160 students felt that the Oracle of Omaha was good enough for them to invest in. Every student listened to hours of insights, taught directly by the Oracle, yet almost every student thought he won’t be good enough.

You probably think that you won’t behave like those students or my dentist.

But you probably would.

We are inclined to perceive things as “normal” because that is the easy way to understand things. Perceiving things as extraordinary requires a leap of faith and more mental effort.

Ergo, the human instinct is unable to spot the outstanding early. The outstanding, by definition, is different. The human mind is inclined to dismiss the differentiating elements, and explains them as similar to everything else. The outstanding has to be prove itself, again and again and again, for the human mind to believe.

For the purposes of investing, this innate quality is not helpful. The cat is out of the bag by the time the outstanding has proven itself to be outstanding. As more investors learn about the outstanding, they would bid its price up to a point that curtails the potential for it to appreciate further.

The point is to spot the outstanding early. To buy and hold X at $5 per share before it becomes $700. To invest in a young Buffett before he becomes the Oracle.

I know one way to do so.

2 – All you need is context, a lot of it.

If you have $122 billion in a checking account, how would you look for an investment?

Most would rely on hordes of lawyers, consultants, bankers, accountants, analysts, and of course, endless meetings. This is the gold standard of corporate due diligence.

Berkshire Hathaway has exactly that in cash and equivalents. Its owners prefer this way:

We really can tell you in five minutes whether we’re interested in something.” – Warren Buffett

Five minutes is all he needs, because he has context. A lot of it.

Within 5 minutes, he analyzes the investment relative to others and knowledge accumulated over 70 years (Buffett started investing at 11 years old. He is 90 now), during which he spent 80% of his days reading.

In an average day, Buffett spends almost 13 out of 16 waking-hours reading (assuming 8 hours of sleep). How much does he read? 500 pages.

Per day.

Todd Combs did that and more. He is now the CEO of Geico, arguably Berkshire’s most valuable asset.

Knowledge provides context. You can identify the outstanding early with context.

To be clear, what you want is not just any knowledge. You want the right set of knowledge, which provides what I term the complete context.

To determine whether X is a good investment, you have to know not only about X, but also everything else that surrounds it and came before it. Knowing all three and seeing their connections provide complete context.

Think about the complete context as a three-dimensional perspective (x-y-z planes, if you recall high school geometry).

The first dimension is a single plane (x-axis). Your knowledge of X per se, no matter how much, is just one plane. It is a start, but not helpful in forming a complete picture.

The second dimension comprises two planes (x and y axes). The additional plane is akin to knowledge of X’s peers, industry, market size etc. In this dimension, you can draw lines to connect your knowledge of X to its comparable peers, industry, market size etc.. A better picture emerges.

So what else is missing? The time element.

The third dimension (x, y, and z axes) includes the historical perspective – the knowledge of X and its peers, industry, market size etc in their past.

Complete context is only possible when you combine knowledge of X (first dimension), knowledge of peers, industry, market size etc surrounding X (second dimension), and the corresponding historical knowledge (third dimension).

Combining all three creates unique knowledge when you see connections among the three. Therefore, the combination of the three is greater than the sum of its parts.

Think back to my dentist and his cousin. Who had the more complete context of X and significantly more success?

Recall that my dentist sold X after his cousin mentioned complex engineering terms and litigation matters. He feared about his lack of understanding, which, in all likelihood, is not because of the inherent complex nature of X.

It is because he did not work hard enough to attain the complete context of X.

And that is the problem with this method. To most people, it takes too much effort.

And the reason it works is because most people won’t do it.

“Read 500 pages every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.” – Warren Buffett

What will you do?