Applying the techniques used by Investment professional in
your business decisions and strategies
Value is a much misused term which is easy to define (one
definition would be benefits in comparison to costs) but difficult to measure
and quantify. Value investing, as a concept, has been around for a long time in
the investment management profession with its most famous proponents being
Benjamin Graham and Warren Buffet. The principles and techniques used by value
investors are equally applicable in most business decisions where investments
in capital and other resources are involved.
Definition
Investopedia defines Value Investing as follows:*
“The strategy of
selecting stocks that trade for less than their intrinsic values. Value
investors actively seek stocks of companies that they believe the
market has undervalued. They believe the market overreacts … resulting
in stock price movements that do not correspond with the company's
long-term fundamentals..”
According to Professor Greenwald of Columbia University**
The following are some key learning from concepts and
techniques used in value investing which can immediately applied to your
business:
1: Invest based on Best Return on Investment (ROI)
Intrinsic Value concept in value investing undertakes a
fundamental analysis of the company – a similar approach has to be the basis of
your key investment decisions. It is extremely important to have a good
methodology or strategy for how the investment returns are calculated or as
Professor Greenwald calls it “a valuation strategy”.
A solid Business case should be driven by conservative and
realistic estimation of benefits and the management team should be very clear
on the benefits, their basis and the timelines.
Caveat – Be sure
to check the basis of the benefits projected in the business case and how
achievable they are.
2: Make a Fact & Analysis Based Decisions
Benjamin
Graham said “the stock investor is neither right nor wrong because others
agreed or disagreed with him; he is right because his facts and analysis are
right.” Make facts and analysis the central tenet of your business
decisions and you can drive out uncertainties surrounding your choices. It is
important to note that within the investment professional, any decisions which
do not have a basis of fact based thorough analysis is considered a speculation
rather than an investment
Caveat: Do be
careful of Analysis Paralysis -
spending too much time on analysis to make a perfect decision and losing the chance to capitalize on an
opportunity.
3: Monitor and Update Business Case Regularly
One of the cardinal sins of value investing is not to be on
top of your investments and the changes in the market conditions or internal
company activities impacting its value. In the case of business decisions made,
it is imperative to re-evaluate the investment on a regular basis by updating
the progress made and results achieved. A change of course may be necessary if
the business case doesn’t add or the ground realities and assumptions used have
changed.
Caveat – The
frequency of the updates/review should not to be far too many as to prevent
actual progress being made on the business decision.
4: Plan an Exit Strategy
Closely related to previous
point and one of the key tenets of Value Investing is not to be too attached to
your investment selections and knowing when to exit. This approach is equally
relevant to any business decisions as well – it is important to regularly
re-evaluate the business case and the benefits and know when to exit.
While formulating a business
case, considerable thought needs to be given to what are the possible triggers
to exiting an investment decision – this can include ROI not being relevants
because of cost or time overruns.
Caveat: Be
careful about when just a course correction is needed as opposed to exiting
from the choice made
5: Take a Long Term View of All Investments
Value Investment is not about benefiting from short term market
fluctuations but about gaining from the inherent value in a business and
thereby the underlying stocks. In a similar sense, where possible, business
decisions should be driven by the long-term business vision and strategy.
Alignment with the overall goals of the company should be the bedrock of any
investment decision made.
Caveat: The
definition of long term changes based on business lifecycle and the industry
Using IT to deliver a Value Culture
Although business systems doesn’t explicitly figure in value
investing, most fundamental analysis in the investment community give a lot of
importance to the management team and stability of the company being analysed. Fact
based analysis needed can be best achieved by a flexible analytical tools
delivered by a Business intelligence platform enabling users to analyse and
understand the information available. The full benefits are achievable if this
is built on top of stable ERP and related business systems driving the
operations. Also, any business decision which has implications of both capital
and people investments should ensure the programme/project has the right team
of people in place to ensure success. The key factors to look for in people for
your key business plans is experience and the attitude to persist with the plan
and see it through.
Conclusion
In conclusion, the concepts and techniques used by the
practitioners of Value Investing can be effectively used to make better
business decisions. Although value investing cannot be the silver bullet to the
tough decisions an organization has to make, it does add an element of
scientific methodology and common sense approach to decision making. Further,
the techniques can help organizations be a better judge of the business value
of internal and externally driven organizational initiatives.
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