How to Know When To Change Strategy

Tom Barton is an extremely successful short seller turned early stage investor. He recently sat down for a talk with Meb Faber and told stories about some of the incredible frauds he helped expose, including how he helped take down the Wolf of Wall Street. While his returns have been remarkable, his superpower has been his ability to understand when it was time to stop pursuing a strategy and shift his focus to something new.

Before Barton explained what he did in the 1980s with short selling, he was careful to say that none of it would work today. In the pre-internet, paper regulatory document filing days of the 1980s, fraud was much more blatant because it was just easier to get away with. Working under the tutelage of a man nicknamed “the mortician” for his ability to kill companies, his firm honed their informational edge by becoming experts in finding fraudulent entities, building short positions against them, and then publicly exposing them to reap the rewards. Gradually, as the returns drew more capital to the space and filings became more accessible, the available returns started to dry up. Once Barton realized this was happening, he moved on to early stage investing in very specific areas where could find other types of edges (mostly in biotech).

Professionally, we can learn a lot from Barton. Our core strategy should always be focused on something we have a natural advantage doing. For Barton, he would have done deep research anyway, but “the mortician” helped him focus his efforts into something maximally profitable. One current, and non-investment based market example might be for someone who identifies as a “people person.” With everyone living in both an online and offline community, much has been written about the desire and time to occasionally synch these relationships in beneficial ways for deeper networking, referrals, etc. There’s a market demand and a lack of skillful individuals to provide quality, custom meetups (see Jason Gaignard at Community Made for more info and ideas). While the social networks and tech will inevitably change over time, a people person with a connector’s mindset as their core strategy can effectively shift focus across this space. 

We all have interests and therefore we also have potential edges that we can exploit. Like Barton, we need to pre-train ourselves to see the opportunity with the awareness that we’ll eventually move on. He never imagined he’d be in biotech today, but he knows that his core strategy remains intact – which is his passion for deep research. If we can keep our radar up and stay aware of how our edge can be put to good use in the current marketplace, we can find the success we’re looking for. When the opportunity set changes, so must our strategy.

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