Don’t let your money go walkabout – weigh up risks and rewards

Richard Farleigh
LET me pose you a question. Is it possible that a business investment that returns ten times the money invested could have been a mistake? Before you think the obvious, “No, of course not!”, please read on.

Crocodile Dundee is a fantastic movie. It somehow managed to capture the best of the Aussie spirit and sense of humour. A mate of mine was lucky enough to invest in the production. I think it was the first movie to star Paul Hogan but, even though he was well-known and liked as a comedian in Australia, it was seen as a little bit of a gamble for the investors. The ambition really was no more than to do well in the local market. When it was finished, my mate was invited to see the investors’ preview. “I don’t think too much of it” was his comment to another investor. The other fellow did like it, and offered to buy him out at his cost price. But my mate thought “Oh well, I’ve waited this long, I might as well see how it goes”. It perhaps wasn’t the right reasoning, but it was the right decision. When the movie was released later in 1986, it took the world by storm and went on to become one of the top ten earners at the box office up to that time. What a home run for my mate. He wasn’t too unhappy!

When I heard this story, I made what some people see as a strange decision: never to invest in movies. My reasoning is that, given the high number of movies that completely fail, such a phenomenally successful movie should really pay more than ten times. If you were fortunate enough to invest early in one of the top companies like Apple or Facebook, for example, you would earn maybe 100 or a 1,000 times your investment. So the ten times return was not a great risk adjusted return. Luckily for my mate, bad ideas sometimes win, just as good ideas can fail.

Assuming that winning ideas are good ideas can lead people astray. Imagine that logic applied to lottery winners. If we assumed the winners have a winning strategy, we would conclude that all we have to do is go to the shop, buy a ticket, wait a week or two, and expect our number to be drawn. The truth is only revealed by looking at the losers too – and seeing the number who did the same thing and lost their money.

Similarly, trying to imitate successful business people can be a mistake. Apparently, Sir Richard Branson in the early days used to go to important meetings without wearing shoes and would ask to borrow a bus fair to get home. He also had a run-in with the law over customs duties. That all worked for him perhaps, but surely it isn’t a recipe for success. The answer is to think for yourself. It certainly worked for Crocodile Dundee in the movie.

Since the mid-1990s Richard Farleigh has operated as a business angel, backing more early-stage companies than anyone else in the United Kingdom.