…excerpt from Mo Lidsky’s latest book, Partners in Preservation

Most advisors, just like most investors—even sophisticated ones—respond to opportunities that come to them as opposed to proactively searching out those that are best in class. The amazing thing is that many of these investors are former entrepreneurs, and they would never have operated their businesses that way. If they had a piece of software or piece of machinery to buy, they would survey the universe of those that offer that software or machinery and choose the best-fitting solution. In the process of building a successful enterprise, virtually all entrepreneurs have to focus on how they, or their purchasing departments, buy and source. Now that they are successful, however, it seems many have forgotten this important activity, almost expecting good opportunities to show up at their doorstep. But why should sourcing investments be treated any differently from sourcing software or machinery?

Imagine for a moment that an individual is standing in a courtroom on trial for murder. The prosecutor commences the hearing and comes laden with a thirty-slide presentation, filled with all sorts of information that implicates the accused and makes a compelling case for his or her culpability. After the impassioned presentation, the judge is still not fully convinced, so he or she fires back a series of questions. After a number of satisfactory responses from the prosecutor, and without giving so much as a word to the defense or the jury, the judge proclaims the verdict: guilty as charged. The reaction would be outrageous. In what developed country would this be considered due process? No legal system in the Western world would allow a judgment to be passed without a presentation from the defense, assuring that both sides of the argument be heard. But when it comes to investing, this is exactly how many investors respond. Someone walks into your office pitching a fund, a real estate opportunity, a private equity deal, or any other form of investment accompanied by a PowerPoint presentation. The potential investor will hear it, read it, raise questions or concerns, and then have the presenter of the opportunity address those concerns. After exhausting all the issues or concerns that come to mind, the investor is left with the decision of yea or nay, effectively serving as the judge and jury on the opportunity without ever hearing the defense.

In the courtroom, both the prosecution and the defense are there to protect individuals, as they give the judge and jury an opportunity to holistically assess the facts. Investing is no different. The primary job of an objective advisor is to effectively serve as the devil’s advocate in order to avoid investment mistakes. The bottom line is it is prudent to avoid being reactive to opportunities. In almost every endeavor—in life and in business— results are superior when one goes out to research and proactively identify a best-fitting solution rather than merely responding to what shows up at the door. This is especially true in investing.

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