“Investing, the practice of a Negative Art”
Benjamin Graham, the "Father of Value Investing", introduced the concept of a negative art in his book Security Analysis.
In some forms of investing (if not all) it is more important to avoid the losers than it is to find the winners. Simply by discarding the bad opportunities, the good investments will take care of themselves. It is a negative art.
Building a HoldCo of SMB companies is a negative art. We pay roughly 5x for the businesses we buy. That is an unlevered return of 20%. We have a permanent capital structure; which means we plan on holding and compounding. If we miss our target by a 1/4 and compound at 15% for 30+ years we will be fabulously successful.
But we must avoid the blowups. How do you blow up? There are multiple ways (humans are great at inventing new ones) but here are a few common mistakes I have seen and try to avoid:
1. Buy something you do not understand
2. Focus on income versus cash flow
3. Take on too much leverage
4. Have too much client concentration
If you invert these 4 and only buy businesses:
1. You understand
2. Focus on the cash flow
3. Take on little leverage
4. Have a diversified customer base
I can guarantee your chances of blowing up have decreased significantly.