Invest Like a Shark




If you haven't watched ABC's “Shark Tank” show yet, I highly recommend doing so.  Shark Tank is one of the few programs that is both educational and informative, and can be a great way to improve your portfolio gains.

Shark Tank is an unscripted show based on actual venture capital negotiations between investors and entrepreneurs.  Millions of viewers tune in every week to see what new invention/business the entrepreneur will pitch to the "sharks," and if the sharks will deem it worthy enough for an investment.

There is an interesting undertone in each episode - the psychological relationship between The Shark Tank and the stock market.

Nearly all entrepreneurs on the show value their company at ridiculous values; companies with little to no earnings/assets are often priced at millions of dollars.  When questioned on value, the entrepreneurs reference the "great potential" of their company.

Potential does not equal a return on investment.  The difference between a potential success and an actual success is time, hard work, customer demand, competition, and a bit of randomness.  The first two variables (time and hard work) can be somewhat predicted based on the entrepreneur's work ethic; demand and competition is much harder to predict, especially during a fast-paced negotiation; and of course randomness is impossible to predict.

Knowing that there is much uncertainty going into these investments, there is no reason for the sharks to pay a substantial premium solely on potential, and they know this.  There are many investment opportunities that do not rely on potential - these companies already have earnings, assets, and demand. 

The sharks teach us a key lesson here - you become successful in the market by seeking out these actual opportunities and leaving the potential opportunities to the gamblers.  A ceramic tile manufacturer may not be as sexy of an investment prospect as a time-travel company, however you can be much more certain to achieve a return on your investment from the ceramic tile manufacturer.  It is all the same type of money, which is the only thing that matters when trading stocks.

Check out the show - it is a much better use of your time than the Kardashians.

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