During due diligence, it's crucial to look beyond returns. Top allocators analyze a manager's decision-making process, not just the outcome. They penalize managers who were “right for the wrong reasons” (luck) and give credit to those who were “wrong for the right reasons” (good process, bad luck).

A common mistake for emerging managers is pitching LPs solely on the potential for huge returns. Institutional LPs are often more concerned with how a fund's specific strategy, size, and focus align with their overall portfolio construction. Demonstrating a clear, disciplined strategy is more compelling than promising an 8x return.

Some companies execute a 3-5 year plan and then revert to average returns. Others 'win by winning'—their success creates new opportunities and network effects, turning them into decade-long compounders that investors often sell too early.

While Buffett's 22% annual returns are impressive, his fortune is primarily a result of starting at age 11 and continuing into his 90s. Had he followed a typical career timeline (age 25 to 65), his net worth would be millions, not billions, demonstrating that time is the most powerful force in compounding.

Financial models struggle to project sustained high growth rates (>30% YoY). Analysts naturally revert to the mean, causing them to undervalue companies that defy this and maintain high growth for years, creating an opportunity for investors who spot this persistence.

The venture capital return model has shifted so dramatically that even some multi-billion-dollar exits are insufficient. This forces VCs to screen for 'immortal' founders capable of building $10B+ companies from inception, making traditionally solid businesses run by 'mortal founders' increasingly uninvestable by top funds.

A fund manager's fiduciary duty incentivizes them to trade potentially higher, more volatile returns for guaranteed, quicker multiples (e.g., a 3.5x over a 7x). Unlike a personal investor who can accept high dispersion (big winners, total losses), a GP must prioritize returning capital to LPs like pensions and endowments.

While many investors screen for companies with high Return on Invested Capital (ROIC), a more powerful indicator is the trajectory of ROIC. A company improving from a 4% to 8% ROIC is often a better investment than one stagnant at 12%, as there is a direct correlation between rising ROIC and stock performance.

The majority of venture capital funds fail to return capital, with a 60% loss-making base rate. This highlights that VC is a power-law-driven asset class. The key to success is not picking consistently good funds, but ensuring access to the tiny fraction of funds that generate extraordinary, outlier returns.