Warren Buffett – renowned investor and 2nd richest man in the country after Bill Gates – once wrote an article called, “The Superinvestors of Graham & Doddsville.”
With a title that sounds like a Dr. Seuss book, it rebutted a popular theory on the stock market called “efficient market theory” – a fancy concept arguing that nobody can consistently outperform the market.
The theory claims that, because information is now instantly available through various technologies like the internet, any pricing “discrepancies” will quickly be corrected – so stocks will always be perfectly priced.
When faced with examples like Warren Buffett – a man who has trounced the market for decades – efficient market theorists call it a “fluke,” saying Buffett-like returns can’t be duplicated.
Buffett disagrees – and based on the data, we’re inclined to take his side. Today we’re going to show you how this relates to profiting from early-stage investing.
Markets vs. Monkeys
Efficient market theorists often use a crude metaphor when describing the task of picking stocks: a group of orangutans flipping coins. With enough of them flipping, they say, a handful will consistently pick winning investments.
They may be right. But what if we discover, as Buffett writes in his article, that the handful of “winning” orangutans all come from the same town?
As Warren goes on to write, “If you were trying to analyze possible causes of a rare type of cancer — with, say, 1,500 cases a year in the United States — and you found that 400 of them occurred in some little mining town in Montana, you would get very interested in the water there, or the occupation of those afflicted, or other variables. You know it’s not random chance that 400 come from a small area. You would not necessarily know the causal factors, but you would know where to search.”
This sets the stage for the main topic of Buffett’s article – and what we think is one of the crucial factors in profiting from early-stage investing.
Buffett claims that there are, in fact, a group of investors – “superinvestors” – that have consistently beaten the market, and they all come from the same “town.” In Buffett’s case, it’s not a real town but an intellectual one.
He calls his fictional townies the “Superinvestors of Graham and Doddsville” – a group of investors that were all former students (and Warren’s classmates) of Benjamin Graham and David Dodd at Columbia Business School. In his essay, Buffett goes through their returns relative to the market and shows how they’ve all consistently beaten the market averages over multiple years, sometimes decades.
The point he’s trying to make is that:
1.It’s possible to beat the market if you apply the correct framework
2.A good way to identify, and profit from, a “correct framework” is to look for folks with above average returns, see what they have in common, and then copy them
We believe the same points apply to investing in start-ups.
Venture capital returns as a whole have been declining for years, and most folks who “dabble” in early-stage investing would have better odds of making money by going to Vegas.
But there are early-stage investors out there who have built long-term track records and made attractive returns. If your goal is to make money in this market, we believe it would make sense to follow these investors, and over time, observe and learn from them.
So instead of introducing you to the “Superinvestors of Graham and Doddsville,” we’ll start you off with a list of the “Superinvestors of Early-stageville.”
3 Superinvestors of Early-Stageville
1.Dave McClure – Founding Partner of Tech Accelerator, 500 Start-ups. Has invested in hundreds of companies, including Mint.com which was acquired by Intuit and SlideShare which was acquired by LinkedIn. You can follow him here »
2.Reid Hoffman – In addition to being the founder of LinkedIn, Reid Hoffman is also an active investor and VC – some notable investments include Zynga (now public) and GoInstant, acquired by SalesForce.com. You can follow him here »
3.Tim Draper – Tim is the founder and Managing Director of Venture Capital firm, Draper Fisher Jurveston. Through his fund, Tim has invested in a number of wildly successful start-ups including Tumblr (acquired for over $1 billion by Yahoo!) and Tesla Motors. You can follow him here »
These 3 investors are part of a much longer and exhaustive list we’ve been creating here at Crowdability HQ. We’re thinking of publishing the full list, or simply creating a service that tracks these people and highlights investments they’re making in real time.