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. 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**, value investing is three things – a good search strategy, a good valuation strategy and discipline and patience. This fits in well with what a good business decision should be based on – a good planning, solid evaluation criteria and discipline to carry it through. Hence, any business planning exercise should diligently apply the concepts and techniques of value investing to derive the best possible value.
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 relevant because of cost or time overruns or a change in company strategy.
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.
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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