They’re not Wall Street tycoons, but they are the some of the world’s savviest and most successful businesspeople.
Shark Tank isn’t known for its lessons about the stock market, but that doesn’t mean that people who are investing on their own or with the help of a digital platform can’t benefit from their wisdom.
Here are 5 investing lessons from Shark Tank that could make you a wiser and better investor.
Lesson 1 – Know the Real Numbers
It isn’t long into any Shark Tank pitch when one of the Sharks invariably asks, “What are your annual sales” or “What are your margins looking like?” It’s surprising that more contestants don’t offer this information upfront because it’s inevitable that the true numbers have to be revealed if they want to get anywhere with their pitch.
After you’ve watched a certain number of these Shark Tank pitches, though, you begin to notice that the Sharks don’t just take what the contestant says as the truth. They question every salient aspect of the number cited, examining it from every angle. They do this for a few reasons; because people tend to exaggerate their success (even unintentionally) when asked, and also because the numbers sometimes aren’t as straightforward as they seem.
This is perhaps the most valuable of all the investing lessons from Shark Tank. People tend to romanticize their portfolios and fall in love with their stock picks. This obscures the truth about whether or not the position is actually making them any money.
You’ve all had that conversation with a friend or acquaintance talking about how they are averaging 300% return on their portfolio. Oh, 300% return? So you mean you’re outperforming most of the investment management and hedge fund industry this year.
I must have missed the articles about you on the cover of Forbes, Barrons, and the Wall Street Journal because that’s where people who actually perform this way end up.
It’s human nature to roughly guess your performance without bothering to calculate the real numbers. Or to cherry pick and only remember the positions that did work out and forget all about the ones that didn’t. Usually this paints a picture which is very far off from reality and when the market brings the sobering truth to light, it can be pretty painful.
Good portfolio management and security selection always starts with good performance measuring practice. Investors should look at:
- Realized gains and losses
- Unrealized gains and losses
- Performance net of fees and trading costs
- Performance net of taxes
- How the portfolio or position performed versus a suitable benchmark
Not as rosy, is it?
Lesson 2 – Stay Grounded
They may seem jaded at times, but these Sharks live in reality. They’ve learned the financial penalties for reading business situations like the latest Harry Potter novel as opposed to an issue of Scientific American.
As exciting as it can be to explore sexy and innovative technologies, the Sharks have done extremely well with investments in businesses that have been, to put it bluntly, mundane.
Recall the case of Scrub Daddy, a simple twist on the ordinary kitchen sponge. It changes texture depending on the temperature of the water. That’s it. There’s no iPhone version #377, no blinking lights or 3D simulations involved here. Yet this was one of the most successful commercial ventures that Sharks ever invested in.
Investors commonly make the mistake of trying to look for the new trend, the explosive growth opportunities that will generate high rewards. The reality is that these success stories are few and far between; most high risk opportunities don’t bear fruit. While it’s not logical to turn a blind eye to high growth potential, don’t allow the euphoria to cause you to neglect the solid, stable and (yes, we said it) boring companies who are tweaking the traditional ways of doing things ever so slightly — and making a killing by doing so.
Which leads us to the second of our investing lessons from Shark Tank: don’t underestimate the value of boredom.
Lesson 3 – Diversify but Don’t Diworsify
The Sharks like well thought out business plans that account for the major risks and incorporate a way to handle them. What they don’t like, though, is when a business spreads itself too thin and loses focus.
So here’s our third of investing lessons from Shark Tank: Investors should diversify, but realize that there is a point of diminishing returns. A portfolio should balance out risk not only at the individual security level but also in terms of market exposures, industries, sectors, and asset classes.
There’s a grave danger to falling in love with any one company, even the great ones such as the Googles and Apples of the world, and allowing it to comprise more than 5% of your portfolio weighting. For commingled funds such as ETFs or mutual funds, there is slightly more leeway — you could potentially put 15 to 20% of your worth into diversified vehicles such as these.
Keep in mind that diversification isn’t one and done; it’s an ongoing process. It’s important to keep watch over time as the market moves and the weightings change. This can be very manually intensive, so you may want to opt for an automated solution to monitor for you.
Lesson 4 – Love Technology
Have you ever noticed how the expression on the Sharks’ faces instantly soften when they see a technology pitch ripe for the taking?
The Sharks love technology because they realize the potential to simplify the route tasks that are a part of our daily lives as human beings. They see technology as a way to reduce error and allow people to focus on where their time is best invested – and that can be gamechanging.
It is truly a thing of beauty to see how well the Sharks optimize the use of time. In many instances a pitch is rejected not as a result of its financial viability but because the Shark doesn’t feel that the rewards will justify the consumption of his or her time.
Digital investing platforms have met with some skepticism from the investing public at large. Online advisors, or robadvisors as many are called, take care of the money management for you, allowing people to focus on their strengths as investors – assessing their personal needs and psychological tendencies towards money and creating a plan that aligns them with their portfolio structure. Many of these digital platforms automate time consuming tasks such as rebalancing, account transfers or onboarding, performance reporting, and tax loss harvesting.
Take the fourth of our investing lessons from Shark Tank to heart: the smart investor of today loves technology and takes advantage of resources that can free up their time for what really matters.
Lesson 5 – Be Patient
Alas, the fifth of our investing lessons from Shark Tank: smart investors are masters of patience. They are long term focused and able to see past the allure of short term performance.
You mean IBM made 10% in one day but I shouldn’t buy more of that stock tomorrow, at its high?
Close the Firefox browser and refrain from watching CNBC. No, you should not react by putting all your available cash into that stock the very moment it reaches its 52 week high!
It takes discipline and maturity to figure out how to apply just the right amount of patience to investments you make. If you can’t do this then consider outsourcing to a professional money manager who is obligated to remain objective in the face of these temptations.