Collaborative Investing: Achieving Higher Returns Through Shared Knowledge

By: Steven Abernathy

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Collaborative Investing is an investment research philosophy that I have followed for 11 years. It has proven its worth time and time again. Essentially, it is uniting the knowledge base of industry experts — practitioners in specific industries with a working knowledge of products — with your financial expertise. To solidify this concept, the industry expert needs to be a co-investor, to align their interests with the firm’s. This allows for the development of more in-depth research, which leads to better-informed investment decisions and a more thorough product understanding, which reduces risk.

There are many aspects of research with respect to investing that must be understood and evaluated in order to make informed decisions. Two of the most important are product knowledge and balance sheet analysis. One should know what the products do, how they are manufactured or developed, what they are used for, and who buys them. Ultimately, the only way to really understand how a product works is to use the product. It is deeply important for a professional investor to understand each product’s “value proposition.” This is largely impossible unless an expert in each area provides true user information.

Regarding the financial analysis, some questions to ask are: Is the balance sheet strong enough to build the business model management describes? Does this company have enough liquidity to survive? To succeed? How does management allocate company resources (return on investment)? How capital intensive is the business?

Collaborative Investing provides a way for investment advisors to extend their understanding of products from the users’ or purchasers’ viewpoint. This is much more objective than relying on briefings with corporate executives. How would you ensure that the information that you are getting from your industry expert is accurate and objective? If the expert’s assets are invested alongside yours, chances are they will work hard to be as accurate and timely as possible with the information they provide.

Many firms hire consultants who are experts in their respective fields; however, because the consultant does not have any risk involved (with the exception of their paycheck) it is easier to postulate information under pressure, which can lead to misguided investment decisions.

In addition, for Collaborative Investing to truly fulfill its potential, all expert viewpoints that you cultivate must be balanced. More than one expert in every industry sector must exist, and from more than one region. For example, if you have a cardiologist from California who says, “All the cardiologists that I know are using X scalpel,” they may only know doctors from the West Coast, while there may be a greater number of doctors from New England that may be using another brand of scalpel. Had you invested in the company that manufactures product X, you may have made a costly decision.

The components that make this type of investment philosophy work are as follows: first, you must find the experts; second, you must get them to invest with you; third, you need them to believe in the model; fourth, you must conduct regular meetings; fifth, and most important of all, you must create a relationship based on two-way communication between your firm and your investment partners.

Building the network of experts and making them investors takes time; however, if applied appropriately, the benefits can be rewarding. Utilizing this philosophy, The Abernathy Group has been able to surpass normal investment results, garnering financial gains of five to 10 times greater than the general marketplace over time, and with less risk. Also, the relationship between the firm and the investor truly becomes a partnership where the interests of all investment partners are aligned. At the end of the day, the client enjoys the investment process because they become a part of it and because they understand that Collaborative Investing costs them nothing while allowing them the freedom to contribute to the process.

Steven Abernathy is the founder and a principal of The Abernathy Group, and currently manages over $150 million, applying three core strategies — deep fundamental research, focused diversification and concentration in high growth industries. He may be contacted at 212-293-3457.