Evaluating management is a difficult task.
Elizabeth Holmes raised $900m & had support from billionaires, VCs, and government officials.
Her invention promised > 200 medical tests with just a drop of blood.
It was all a ruse.
My reflection & lessons on evaluating management:
Elizabeth Holmes raised $900m & had support from billionaires, VCs, and government officials.
Her invention promised > 200 medical tests with just a drop of blood.
It was all a ruse.
My reflection & lessons on evaluating management:
1. Never stray too far from your competence
Be aware of your circle of competence.
It is easy to give in to FOMO when you see others making a ton of money, especially in complicated & rapidly growing sectors.
Develop a discipline to invest only when you understand the product.
Be aware of your circle of competence.
It is easy to give in to FOMO when you see others making a ton of money, especially in complicated & rapidly growing sectors.
Develop a discipline to invest only when you understand the product.
2. Is management beating around the bush?
Assess if management can answer difficult questions without using a bunch of fluff words.
We want management to be candid and straightforward.
Assess if management can answer difficult questions without using a bunch of fluff words.
We want management to be candid and straightforward.
3. The lie detector
Dan Ariely, author of multiple books on human psychology, suggested that lie detectors work when participants are aware of their selfish deed.
In a test where participants were told to lie for charity, the lie detector tests failed 100% of the time.
Dan Ariely, author of multiple books on human psychology, suggested that lie detectors work when participants are aware of their selfish deed.
In a test where participants were told to lie for charity, the lie detector tests failed 100% of the time.
For Holmes, she convinced herself that she was doing this for the greater good.
For investors, this means that we can't entirely rely on reading body language and the tone of management.
Always verify what they say and promise with their output.
For investors, this means that we can't entirely rely on reading body language and the tone of management.
Always verify what they say and promise with their output.
4. Capital allocation
For Holmes, $300m of the $900m raised were funneled to lawsuits & refunds.
Study the management's capital allocation.
Since $AMZN, many management cite investing for the future as the main reason for burning cash.
But not many will turn out to be $AMZN.
For Holmes, $300m of the $900m raised were funneled to lawsuits & refunds.
Study the management's capital allocation.
Since $AMZN, many management cite investing for the future as the main reason for burning cash.
But not many will turn out to be $AMZN.
5. Verify the product
There were great discrepancies between Holmes' machine lab test results and the results of commercially available tests.
It's easy to be caught up in the moment when the management is charismatic and the product is "revolutionary & disruptive".
There were great discrepancies between Holmes' machine lab test results and the results of commercially available tests.
It's easy to be caught up in the moment when the management is charismatic and the product is "revolutionary & disruptive".
Always conduct your due diligence.
And of course, invert, always invert.
And of course, invert, always invert.
This is the end of my reflection!
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