Time Economy’s best investment series – stocks and alternative valuation methods
Perhaps the most in-depth research of the stock market ever done was conducted by Jim Collins and his team. Their work researched more than 23,000 companies throughout a period of 40 years. Not less important than the thorough review, were the researcher’s conclusions: out of 23,000 companies, only 15 complied with the researcher’s criteria for a truly great company.
A great company is one that not only is providing 3 times higher value than the S&P index but is doing it for 15 years in a row and better than its competitors. Even more remarkable is the researcher’s claim for what distinguishes those companies from all other companies – the key reason for their success.
It seems that all 15 top-performing companies were enjoying the management of a true leader. Someone so unique that the true value of the research ended up being much wider and more valuable than its important financial calculations – the best selling book – “Good to Great: Why Some Companies Make the Leap and Others Don’t” written by Jim Collins, not only suggests the reason why some companies execute better than others but why and when we as human beings execute it as good as one could. It points what are the few critical behavioral patterns or characteristics that can make us the best leaders we can be – “Leader Level 5”.
Unsurprisingly, should a “Leader Level 5” lead a company, the company may have a fair chance to excel in its executions and reach much higher levels than companies led by lower-level leaders.
When we try to estimate the value of a company and the stock potential of different companies, we seek the help and advice of professionals – analysts. People that may have well-based education in finance, economics, or accounting. They are able to calculate and weight the companies’ profits, expenses, quarterly results, forecasts, and many other parameters to a single parameter quantifying the total company’s worth, an estimation on how those companies are doing, and how successful are they expected to be in the future. But is it really the right way to measure the stock’s potential? Is summing up mainly financial parameters to another financial parameter the best way? Is it the only way? What other ways does the world offer us? And when might those ways serve us better?
Should we choose to learn from another group of “analysts” that are not less professional, we would look at “analysts” investing in early-stage companies – venture capital funds, or VCs. As they typically invest in Startups, they have much less financial data available, having no choice but to give a much higher weight to people. They review the business plan within its market potential and technology, but they typically make their decisions by the impression they get from the founder, the leader, and his team. It is not an easy decision to make, and as companies grow bigger and more data becomes available, it is hard not to fall into the “trap” of taking the easier decision – the “no brainer decision”
If the company offered a two-digit growth in the last 4 quarters, why should we get into CEO’s personality tests, complex psychology, and other things that may feel like a much less solid growth compared with numbers and trends that even anyone can easily recognize on a simple graph?
In other words, when trying to anticipate which stock we should invest in, it is much more natural and easy for the human brain to consider numbers vs. numbers rather than jumping between different fields of specialty and draw complex unquantified conclusions.
It is hard to determine if a top-performing leader is an ultimate solution to all questions and if in his devoted and capable hands nothing can turn into gold. It is enough for us to think of one or two examples of highly capable leaders that did not succeed to have such claims, regarding it as circumstantial, and stick to the numbers.
But how many times did the numbers say that the stock is on the right track and then it all crashed? And what if we could quantify into numbers the contribution of a level 5 leader?
Could it be that a company lead by a leader level 5 tends to end up as a better investment, and how can we know which company is lead by a level 5 leader?
To be continued…
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Money Making article
Evaluating products and companies’ potential based on the total time and resources invested in them, compared with the amount of time they may save, improve, or create for others, may offer a more adequate valuation of the true long-term potential of a company or product.
1 million to 1 billion
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