Looking both ways before crossing a busy street makes sense. It’s something we all know and do. Here are three ways to do the same thing before leaping into buying shares in a public company.
1 Who’s behind the wheel
The CEO behind the wheel of your company can make all the difference in your investment. The executive staff and Board of Directors can make a big difference, too. More than cash, inventory, receivables, intellectual property, brand, plant and equipment it’s people who are the most important asset of a company. Knowing management’s experience can help you make a more informed investment decision. There are no guarantees in business other than change. At some point in time, an investor can count on their investment in a public company being affected by change. It might come from any direction. The quality of a CEO’s response to a change in the company’s social, economic, political, competitive or technological environment could have a significant impact on the company and your investment. There is no absolute truth for what makes a great or disappointing CEO. Here is a sampling of some extraordinary CEOs from Barrons. A CEO’s failure to recognize a significant change contributes to the poor performance of a company and to the profitability of your investment You’ll most likely recognize many of these examples of CEOs who greatly disappointed their investors from Business Insider.
2 How does the company operate
The better you understand how the company operates its business and makes money the better your investment outcome. Four major areas can help you better understand a company’s investment potential.
Identity: Several identity elements might include: brand, mission, reputation in the market, target market, and unique culture.
Strategy: How the company implements its mission with concrete action can be affected by: coordination between business units, the time frame for achieving goals and the resources available.
Internal assets: Included in this area are people, products and services, organizational structure, financial resources, intellectual property, distribution channels and tangible assets.
External environment: The context within which the business operates includes: customers, suppliers, partners, competitors, market demographics for the market and technology.
3 Competitive Edge
The broader and more substantial a company’s competitive edge the better its prospects as a profitable investment. Porter identified four generic competitive strategies: no frills, uniquely desirable products, offering a specialized service in a niche market and cost and differentiation focus. To these you could also add: a target audience with a clearly defined need, a high-quality service, attractive price, exclusivity, being the best and great management. There’s no doubt about it. A company with the right stuff can enhance your investment potential.
Investing in companies you understand and at a price you can afford is a better way to protect your investment.