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How to create a wise crowd

Last week, I wrote about the process by which a properly formed committee or crowd can consistently make better decisions than any of its individual members. I was inspired by James Surowiecki’s 2004 book, “The Wisdom of Crowds,” and by my recent experience with a unique approach to reviewing complex and potentially risky investments.

The gist of Surowiecki’s thesis is that groups of individuals, acting as individuals and without either mimicking each other or blithely following one strong leader, can apply their collective wisdom to forward-looking decisions. When this structure breaks down, the same group or committee can make ruinous decisions, and often will.

By the summer of 2000, Randy Williams of Orinda in northern California had tired of finding himself solicited to invest in one business venture or another, only to watch many of his investments go the way of the dodo. Williams knew there had to be a better way to make private investments than relying solely on his own review and trying to judge whether or not the sponsor was giving him the full story.

Pulling from his sizable network of friends and business contacts built over the years, Williams founded the Keiretsu Forum. The word “keiretsu” is a Japanese term that describes a group of corporations with broad reach and interconnected interests.

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The Keiretsu Forum is a collective of individual private investors who seek and benefit from the wisdom and talents of other investors and entrepreneurs. The group’s mission statement is, “Great association and quality deal flow.”

The Keiretsu Forum is now national in scope, with chapters in many major cities, including a fledging chapter in San Diego. You can get more information at www.keiretsuforum.com.

The forum’s process for reviewing and making decisions about private investments would make even Surowiecki proud. A company or investment sponsor seeking investors first applies through Keiretsu Forum’s Web site.

This is an important element of the group’s workings, since all potential deals come in the same way. There is no back-room arm-twisting going on.

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The application is assigned to an appropriate committee composed of individuals experienced in the field of relevance. Committees include software, life sciences, real estate, food and beverage, and other industry specialties.

After a period of initial review, the committee may or may not recommend the company make a presentation before a larger, diverse working group. The process of exposing the investment idea to a diverse group ensures that another of Surowiecki’s key criteria is met: Individuals are able to do their own research and ask their own questions.

During this presentation meeting, the applicant has a chance to address concerns and questions. After the applicant leaves the room, a frank and blunt dialogue is held and a vote is taken.

With sufficient support, the applicant is invited to make a second presentation to and even more diverse group a few weeks later. At that point, a final committee is formed to perform an even more detailed an in-depth review before making a general recommendation to the entire membership.

Finally, each member is free to make their own decision and either invest or not invest.

I have made three investments on behalf of myself and my clients in projects that have come through the Keiretsu Forum process. I winnowed this list down from about 25 opportunities I have seen presented. I expect to make more such investments in the future.

When I compare the above process to the one most investors go through, my skin crawls. Typically, investors hear of private investments, such as real estate or private equity, from friends, family or from a broker or other commissioned agent.

At a Keiretsu Forum meeting, I am shoulder to shoulder with people who have founded and sold wildly successful companies. I listen to analysis by CEOs, economists, scientists, entrepreneurs and some generally very smart and successful people, all of whom are on my side of the table.

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Just when I’m close to being sold on an investment idea, someone else in the room will manage to point out the one hidden flaw that no one else was seeing. We usually thank that person after the meeting.

With stocks and bonds priced to provide rather meager returns over the foreseeable future, private investments offer an opportunity to keep parts of our portfolios earning the higher returns we seek. Groups like the Keiretsu Forum can make the process of selecting those investments safer, more enjoyable and more profitable.

Rick Ashburn manages investments for private clients. Write to him at rick@richardashburn.com or 7777 Fay Ave., Suite 230, La Jolla, 92037.