5 investment rules we share with Warren Buffett (and 2 we don't)

Posted by Éléonore Jarry-Ferron on Apr 13, 2017

In February, we released our 10-year net IRR: 66%, beating the S&P 500 almost tenfold.

We’re certainly not the first to beat the stock market, so I wondered: what do all the people “beating the stock market” have in common?

I turned to legendary Warren Buffett for some wisdom. With a net worth of over $74 billion, he certainly has some credibility as one of the most successful investors of all time. If you had invested in Berkshire Hathaway 10 years ago, you would have made an average yearly return of 22.9%, 3x the S&P average.

After analyzing the “Oracle of Omaha's” thoughts investment thesis, I found a few similarities (and differences) with how we invest at Brightspark.

1. Invest in what you know.

Warren has famously advised to “Never invest in a business you cannot understand.” At Brightspark, we proudly stick to our investment thesis and only invest in what we know. Thankfully, our experience covers a wide range of tech industries and we’re thankful for our network of advisors. They are the best in their respective fields and continue to advise us on other emerging industries.

2. When you invest, plan to hold the stocks for a very long time.

Warren says, “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” Replace “owning a stock” with “investing in a founder” and you get one of Brightspark’s core investment pillars. One thing venture capital has taught me is that there is no such thing as an overnight success and that all good things take time.

Another popular investor that’s beating the stock market is Fred Wilson, a seasoned venture capitalist who backed the likes of Twitter, Kik, and Etsy. He says that VCs should let their winner investments run as long as they can. We share the same philosophy at Brightspark.

3. Focus on high quality businesses.

Warren says, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”, and we couldn’t agree more. Although ownership is crucial in venture capital, Brightspark believes in investing in incredible teams under terms that are beneficial to everyone around the table instead of chasing bargain valuations. In the long term, we believe that this mindset leads to much higher returns. 

4. Spray and pray doesn’t work.

On the topic of diversifying your portfolio, Warren says, "Wide diversification is only required when investors do not understand what they are doing." While you should ALWAYS diversify very risky investments such as VC, we believe that investing almost randomly in a maximum number of companies brings lower returns than being extremely diligent when placing bets on portfolio companies—and we’ll make sure to keep the same strategy even as we continue to scale our investment pace.

5. Cut through the noise. Don’t blindly follow the trends.

Warren claims, “Remember that the stock market is a manic depressive.”  Truth be told if there is one thing more manic depressive than the public markets, it’s the tech startup journey. This point deserves to be broken down :

Don’t invest in hype.

An advantage Brightspark has over other VCs is the experience of our managing partners. One of the main lessons they have learned is to stay away from the hype. This means they invest in markets where customers are already spending meaningful dollars, not markets that are featured in the tech press every day.

When you back great founders (see point 3) and interests are aligned, have faith in the team.

We are generalists investing in teams that are experts in their respective fields. Once we partner up with a company, we give them all the faith they need to become successful. Building a company is like a roller coaster. There will be times when the technology takes longer to launch, when revenue objectives are not met, when new competitors arise, when Google decides to get in the space, and when everything feels like it’s falling apart. It’s the VC's role to cut through the noise and be there for the founders in those times.

6. Invest in “boring.”

Now, we don’t see eye to eye with Warren on everything. He has been known to praise the value of ‘’boring’’ stocks, in other words, companies selling basic everyday products such as Procter & Gamble, Gillette and Coca-Cola. On that subject, he says “We make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it.”

While this might be true when investing in the stock market, venture capital is exactly the opposite. We invest in daring people, fighters, and visionaries, solving difficult problems with smart, unique, and out-of-the box solutions. Our business is about betting on the non-obvious, on disruptors, on technologies knocking over traditional industries — and that’s the furthest thing from boring.

7. Don’t lose money.

Buffett’s #1 advice, for obvious reasons, is not part of Brightspark’s investment philosophy. The name of the game in VC is that you will (very) likely lose some of your investments, but your winners should make up for your losers. Uncontrollable factors such as luck and timing play a huge part in early-stage investments, and there’s no way around it—you will probably lose some money along the way.

At the end of the day, what do Brightspark and Berkshire Hathaway have in common? Historical returns way above industry average in our respective asset class. Although stock markets and startup investing are different beasts, we seem to share similar investment philosophies.

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