Does due diligence matter?

Welcome back and happy Friday!

Today I wanted to discuss my response to the below meme - which was very well done, if I may so myself (shoutout to Eli!).

By the way, the investment in the original post was actually just made! Fascinating story in its own right.

The short explanation of the meme: while the majority of people think due diligence is important, higher & lower IQ investors both think you should just trust your gut.

For those of you who are unfamiliar with the meme format (or probability distributions), I’d encourage you to read this over coffee this weekend - it’s actually pretty well done!

The question I’d like to discuss today is to what extent is the above meme true? To what extent does due diligence ACTUALLY matter?

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First, I’ll just say that IQ isn’t as relevant as people might think in terms of investment success … so the x axis might need some amending.

I know extremely high IQ people who are terrible investors and low(er) IQ people who have done phenomenally well with their investments.

So, perhaps we should change the x axis to something like wealth, right? After all, accreditation depends on a certain income or net worth!

I disagree here as well - I know plenty of people who are extremely wealthy who are terrible investors. I also know people who aren’t accredited, but are very sophisticated at picking apart investments and understanding risk.

So, where do we go next?

My proposal would be level of due diligence experience - we’ll call that DD IQ! Check out the updated meme below! 👏

So, where does this leave us?

While the majority of people (middle of bell curve) think due diligence is important, higher & lower DD IQ investors think you should just trust your instincts.

Would such a statement accurately represent reality in the retail investor universe?

It might surprise you to hear this, but I think it’s actually is spot on!

Here’s why:

• Low DD IQ:

• **Belief: **trust your gut

• **Reality: **unlike the other folks below, these people are gambling while thinking they’re investing .. a dangerous territory but the depiction is very representative of reality from my experience

• Middle DD IQ:

• **Belief: **due diligence is super important!!!

• **Reality: **this category of investors is extremely accurate as well, and (in my opinion) a very healthy place for retail LPs to be. You know what you know, but are also aware that you don’t know a lot and aren’t afraid to ask “stupid” questions to learn

• High DD IQ:

• **Belief: **trust your gut

• **Reality: **this, again, is essentially accurate. If you’ve ever been in investment committees at firms that look at a ton of deal flow, you’ll know exactly what I mean - good deals just feel good, and bad ones give you a strange feeling. Many investment professionals will make these decisions in a matter of minutes - but make no mistake, this is after seeing thousands of deals (sometimes across decades!)

• I actually sat on investment committee at a Public REIT and shared some of my lessons from that experience

So, in essence, the job of a retail LP is get enough DD experience and see enough deal flow to (1) turn deals down quickly and (2) spend your free time digging into the better ones. As you do this more and more, you’ll find that this due diligence time starts to drop because you’ll develop a gut feeling for what feels right.

In many ways, what I’m trying to do with these newsletters and GP-LP Match is slowly move retail LPs from the left side of the bell curve to the right… hopefully we’ll get there one day at a time.

As always, I hope this was helpful and I look forward to your feedback!

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