Thursday, July 1, 2010

The Real Deal of Business Deals and Investments


I have been out on my own for a period of 8 months so far - re-skilling, traveling around the world from Hawaii to New York to Germany and China to shake hands and establish material sources, all the while burning up what little savings I have. And it was only until just recently that I managed to ink my first deal, a small sum that is just sufficient to cover my costs in exchange for a good project reference.

This 8 months has been a great journey, and a very humbling experience. The most important of all my takeaways was understanding the real essence of conducting business in the real world. It is truly something that can never be learnt in classroom, or just talking to friends.

Commonalities in the lines of the greatest investors - importance of management and ethics

It dawned on me why the greatest investors of all times always talk about a similar topic - Phillip Fisher in "Common Stocks, Uncommon Profits" spoke about using the 'scuttlebutt' approach to assess the management team; Warren Buffett spoke a lot in his letters to shareholders about ethics and how a company management ought to behave in terms of being shareholder oriented and proper accounting of options. Or in Collins' "Built to Last", which he spoke of the importance of a management team that focuses on building a clockwork system instead of being ego-centric. I could finally appreciate it all, firsthand.

The essence of a business - people, ethics and responsibility

If one analyses a business, takes away the financial accounts, mysterious cloak of systems and strip it right down to it's most fundamental essence - we are really talking about people, their ethics and sense of responsibility. People run the systems, they select the products and sell their services to meet a real world need. In essence, a business transaction is a case of a client taking a risk on another person to address certain needs, value add, or solve some problems. It does not matter whether the transaction is a few dollars, or millions; what remains unchanged is the trust and responsibility that is placed upon one when money exchanges hands.

A second dimension of business ethics is the treatment of the staff - hiring someone is more than just that getting someone to fill a gap or another hire-and-fire HR concept. It means providing that person a livelihood, a stable income so that he can pay his housing loans and bring the bread home to feed his family. It is an added responsibility on the employer to then ensure that the business is sustainable to keep everyone on the payroll.

Doing business calls for one to have a high order of character and leadership, only then, can one build a strong team around him to effectively run different parts of the business machinery. Only then, can one talk about moving from goodness to greatness.

Conducting investment in the words of a venture capitalist

I once asked a venture capitalist on how he decides to make an investment in business proposal, and he tells me "All business proposals appear similar - payback period of 2-3 years, 50% absolute returns, exit strategy of public listing in 5 years, marketing plans, strategic positioning, etc - almost impeccable. But at the end of the day, the determining factor is my assessment of the person and the team running the show. I just want to know if this person is credible, trustworthy, and responsible enough to make the best of my money" What an enlightening last liner, that all of us always fail to see.

The real deal

In all our stock investments, we should carry with us that same eye for this critical detail - the effectiveness and trustworthiness of the management and the staff. Accounting numbers can be fudged to show stellar PE/gearing ratios, such reports are custom made to impress. So place some focus on assessing the people running the company. The real deal comes when you pose as a customer to walk the production floors, and when you meet the company staff in person.