On pages 133-34 of Rule Breakers, Rule Makers appears one of the most telling passages of the Rule Breaker section. It's entitled, "Invest Like a Venture Capitalist, Not a Banker."
What do I mean by this?
Well, bankers eschew risk. They need constant assurances from whomever they "invest in" (loan to) that they will get their money back, with interest. And that's what they're focused on: interest, smaller amounts of money coming back to them with a high degree of certainty.
Do you invest this way?
Many people do. And you know what? I don't begrudge them. The fact is, many people should invest this way. Most people do not have a high degree of risk tolerance. And most of America needs to be educated lots more about the stock market before taking on the sort of risk involved in staking a claim in a Rule Breaker.
Hey, bankers don't need to know that much. They review forms filled out by clients seeking loans, where clients put down on paper with a few references a list of assets or collateral against that loan. It's not a job that requires a high degree of intellectual curiosity, the simple reality being that intellectual curiosity doesn't particularly figure into the process. In fact, early on in the corporate history of The Motley Fool, though our private market valuation was sizable, we had a really hard time getting a short-term loan to buy new office equipment. I had to sign over a personal assurance to a banker who didn't otherwise trust "Internet businesses." We had few tangible assets -- which is the sort of thing banks need to see before making loans. Bankers look at "e-businesses" -- those built among other things on human capital, community, and brand -- the same way that tigers look at chess boards. What-EVER.
So most of the world invests like a banker, for numerous and perfectly legitimate reasons.
But you're now spending time on THE home page of Rule Breaker investing, here... our Global Headquarters. You've read our six principles of portfolio management, you've studied the approach, you're familiar with our holdings.
Not only that, but something more important. You DO have a high degree of intellectual curiosity, you view business as a terribly interesting phenomenon, and to a certain extent you may view the world at large as one great big fascinating fun game board. You're almost certainly interested in technology. You are probably an early adopter. And you are playing to win. You are a risk taker. And you must therefore invest like a venture capitalist.
Venture capitalists -- the best ones -- often do not have tangible assets to look at. They are looking at human capital. People. People with visions or ideas. Venture capitalists must eagle-eye these people and assess their potential to carry out their visions. And venture capitalists must also examine the business model -- how money will be made. And further, they must assess to what extent the companies they invest in can protect those profit streams. It's all very well to look great in 1999. But what will your business and your industry-at-large even look like, by 2002?
If these viewpoints and some of these questions have a familiar ring, that's because they're exactly the sorts we ask of our companies here in RuleBreakerdom. Amazon.com didn't have any profits when we invested in it. eBay had nary a tangible asset. (Still doesn't.) Starbucks in the eyes of many has always been just a fad retailer.
And yet what appears to be the single most requested Web clipping app for the new wireless Palm VII? Would you believe it? According to www.palm.net, it's the Starbucks Coffee Store locator.
That's right: Tap the "Auto-Find" button on your Palm VII, and the wireless capability of that little device will show you in a few seconds the two Starbuckses nearest to where you're standing.
That's about mindshare, which is one of the most powerful drivers of the best Rule-Breaking businesses. Yet mindshare doesn't show up as an asset on corporate balance sheets. And there's no "price-to-mindshare ratio."
Most of the world -- the bankers -- continues to look just at balance sheets and price-to-earnings ratios, and so most of the world will always miss these companies early on. Eventually, as some few Rule Breakers transition to Rule Makers, investors of all stripes will then beat a path to their doors.
But up until then it is those among us who venture our capital on what seems like a Fool's bet that make most of the money.
So to my fellow Rule Breakers, I remind you: Invest like a venture capitalist, not a banker. Look to become a significant, committed owner of businesses, not a temporary lender hoping to make a few hundred basis points.
As I close that passage in the book, so I'll close this report:
"This approach to investing is not for everyone -- bankers need not apply. (Sorry, bankers, but I'm just not a big fan. Not that you need me anyway, you rich rapscallion dogs.)"
One last thing before you consider heading over to our Foolanthropy page to make a donation in the Fool's Charity Drive: On this week's Motley Fool Radio Show, our Motley Fool Radio Millenium/Century Special, we want to hear from you. What was your dumbest investment this century? What was your smartest investment this century? And how are you going to bring in the New Year? If you're interested in participating in this week's Fool Radio, e-mail Fool Radio producer Mac Greer at email@example.com with your thoughts and a daytime phone number. And if we take your call on-air, we'll send you a free copy of our newest product, Industry Focus 2000.