October 29, 2010

You Only Get Five Tickets

Warren Buffett is renowned for his ability to wait patiently for the right investment opportunity to come along. Instead of spreading his capital across a wide range of investments, he loads up on the very few that demonstrate tremendous upside potential. That's one of the primary reasons he's been so much more successful than most professional money managers. To cultivate that mindset, he once proposed that investors imagine they only had five tickets for their entire lifetimes, and making an investment required the use of one of those tickets. Just think how much more selective you would be if your portfolio operated under those limitations!

Well, Buffett's ticket analogy is actually a fairly good description of what an entrepreneurial career is like. Entrepreneurs don't always invest much of their own money in their startups, but they do invest something even more precious—their time. Jeffry Timmons observed that entrepreneurs often have to be committed to their ventures for 7-10 years before a capital gain can be realized. Even a failed venture is likely to eat up 2-3 years of your life. All of this imposes real limitations on the number of startups a serial entrepreneur can be involved with, and the later in life you get started as an entrepreneur, the fewer that will be.

The lesson to be drawn from what Buffett and Timmons are saying is that entrepreneurs should always be mindful of their opportunity cost when considering a new business idea. Think hard about the opportunity and ask yourself if it's worth burning one of your five precious tickets. If it is, give it all you've got. Otherwise, develop the patience and discipline to wait until the right opportunity crosses your path.

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