Investment Lessons from First Year in Business
Stewart Motors 1st Birthday!!! Actually this business has been around for more than 50 years, its just that I've now owned it for one year. :)
Today marks the first year since I bought this business and it has been a blast! This is obviously not my first business but it is certainly one of my favourites! Maybe it's because I get to drive an ambulance or police truck from time to time. ;) Boys never grow up.
What Warren Buffett said about business is so true. "I am a better businessman because I am an investor. And I am a better investor because I am a businessman." Warren Buffett
And I thought I would take this opportunity to talk about BUSINESS. Josh Kaufmann defines a business as a repeatable process that:
1. Creates and delivers something of value…
2. That other people want or need…
3. At a price they’re willing to pay…
4. In a way that satisfies the customer’s needs and expectations…
5. So that the business brings in enough profit to make it worthwhile for the owners to continue operation...
Kaufmann goes on to explain how every single one of these elements MUST be present for it to actually be a business because:
- without value creation, it is a hobby
- without creating attention, it will flop
- without sales, it is a non-profit organisation
- without delivering on promises it is a scam
- without sustainable profits and financial structures, it will inevitably close
How about your business? How about the investment you are considering? Does it fulfill all these 5 criteria? How does it rank on each of them?
Let me use this auto business as an example.
1. Does it create value? For sure! People will need to service their cars, the ambulances need to be kept in good condition etc.
2. Are we creating attention. More accurately, is the business getting attention? Are people aware of it and coming to it? I don't spend much on advertising as the business has a pretty good reputation but we do constantly try and engage with customers both online and offline. Make sure that whatever business / investment you are considering, it is not something obscure that nobody knows about.
3. Sales. Yep. We try to keep to a price point that is fair for our customers, whilst ensuring we can pay our bills and staff. Pricing is a strategy as well. How does the business you are considering price its products? Does it make sense? Does it provide value in excess of what customers pay?
4. Delivery. Does the company deliver on its promises? Does it have good customer service and follow up? How do customers feel about the product? Do you google and check reviews as part of your research?
5. Sustainable profits. The auto business is profitable but in the investment arena, this is a tricky one. Many "modern" start ups operate on the model that it is more important to get market share rather than be profitable. Food delivery is a good example. Say it costs $10 to deliver food. The food delivery company might charge you nothing in order to gain market share. They then make the restaurant pay for $2 of the cost by accepting a lower margin. And get the other $8 from venture capitalists who are willing to back them whilst they lose money. The aim of the game is to be the last man standing so that after all the competitors run out of cash, they can hopefully start to charge monopoly rates. I know this is simplified but this is one reason I find it very hard to invest in loss making companies. In any case, there are quite a few profitable ones that are cheap enough now.
If a company scores well on each of these 5 factors, you might have a viable business. You then need to figure out if the investment is worthwhile based on the price you have to pay for it in the market today.
I have a lot more to share by expanding on some of the points but as a framework, these 5 factors are pretty useful for analysis.
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