Stats and investors

Ok, this amazes me…I have just listened to a talk by an institutional investor in Australia [exact sector withheld].

Part A was all about what is wrong with the standard model for investment in their sector.

Part B was their hypothesis for an alternative approach that addresses some of the proposed issues.

Part C was them saying they are actually doing their Part B hypothesis. ‘Please give us money’.

In which case their chances of success are almost zero…by this logic.

The current model is loss making.

Their chances of having identified the problems correctly is probably 1 in 10.

Their chances of having identified a solution to the problems that works is also 1 in 10.

Their chances of executing the solution correctly is also 1 in 10 – it usually takes a few cycles of people trying for this to work.

So their chances of success are 1/10 x 1/10 x 1/10 = 1/1000

A rule of thumb is to only invest in business models that have been proven to work and also proven to be profitable. Ideally you should also invest in teams that themselves have been profitable.

Shame on those who knowingly add unnecessary risk to their investment decisions.