KCQ's Chapter 2

ACCT13017 KCQ’s Chapter 2

Life has many different journeys. The beginning of my degree started off as a Diploma and when I achieved success, I decided to go even further. I reset the goal posts and now I’m almost finished. When I’m done, it will be time to reset the goal posts once more. I guess it’s the same with companies.  With proper analysis and perhaps a little luck, they will achieve their goals and continue with success. It’s all a bit unpredictable, but as with achieving a degree, a bit of study goes a long way to achieving success. It all depends on what you do that adds to the value of the destination.

It’s all very subjective, what adds value to me? To me, the investment into gaining this degree means increasing the value of my family’s quality of life, so highly valued. Businesses would be focusing their efforts on the areas they value too. Could this reflect bias in their accounting methods and distort an outsider’s view? Where do we look for subtlety’s indicating predisposition?

Carpe diem – Seize the day!  One of my favourite lines from “Dead Poet’s Society”.  We have only today to react and tomorrow to respond but to succeed, we need strategy. As an investor I would be interested in the current affairs of the company’s industry, the down low on sustainability of the resources the firm needs, who are their rivals and how are they handling things, what are other future possibilities. I want to know the ethics and values of the company organisational culture, their abilities and weaknesses. These are things I would need to consider before investing and make comparisons to my personal alignments. The main goal in mind being to make more than invested and the firm’s capacity to do so.  I can see that a firm’s strategy shows its’ intentions and previous intentions form patterns and patterns form indications of the big picture. From Rymans example, I need to find how the firm is employing leverage from it’s operating liabilities and utilizing net operating assets. I need to study the firm’s ability to sustain its’ intentions. Of course, if they matched Ryman’s ability, it would be very attractive to the investor, well one can dream!

I’m finding the concept of the cost of capital confusing. How on earth do the capital markets use the clearing price when there are unlimited potential uses?  Does this mean equity interests ‘go off’ after just one day if not consumed? I get that investors are buying the future of a firm and guessing that some returns are more likely than others but what is the real guarantee on the expectation of a return? It all seems a very risky business in predicting whether a firm will create value and earning a return greater than the cost of capital we are willing to invest.

What does strategy look like? How would we recognise it in a dark alley? I’m guessing ‘the persistent stuff’ are the things a firm consistently does well, the repetitive daily grind that keeps them going. These are the heart and soul of the business and our focus for research. Then look at the competing environment and how they stack up when faced with the same challenges. How does the firm add value for its customers? Who is their target market?

Plan, Ploy, Pattern, Position or Perspective

I’m familiar with the 4 P’s of marketing, product, price, place and promotion, to some extent I can relate. Every business needs a plan, a direction and a map to get there. So, it makes sense that a plan would include the business intention of addressing the market, its competitors and challenges it faces. In contrast, a ploy would be countermeasures to try and outsmart the competition. This would involve creating barriers to new competitors from entering the market and in general make it difficult for the competition take market share. Kind of like how Apple protects their technology and limits accessibility to prevent copycats. Patterns may be more difficult to ascertain, without in-depth research. Keeping with the Apple example, I think their pattern strategy would be to constantly keep updating, keep the customer up to date with the latest and greatest. In this respect, I would expect a lot of Apple capital would be employed in developing new technologies and thus creating the value add for their customers.

The key to positioning is too home in on the aspects of the firm’s environment and match them with strategies to give them a competitive edge. This is the firm’s ability to provide defence mechanisms against the competition and future challenges. After discussing this point with Dr Martin, I realised that position is much more than market share. It’s about stance on issues that affect the company’s values, it’s about their position in the community, industry and the world! It’s a lot more challenging than I expected and will be difficult to apply to my company.

Perspective is more difficult to define. It seems to be attitude, personality and integrity, almost like the Myers Briggs test for companies. How does this affect their ability to make decisions? What determines the organisations behaviour? Perspective is people!!! It’s about the personality of the people in charge, the decision makers. Every leader puts their personal touch on the organisation they lead. This means we need to know the people, their values, personality and ethics and how that reflects in the business. Richard Branson comes to mind with his well-known ethos of “Train people well enough so they can leave, treat them well enough so they don’t want to.” This tells me his business is willing to train employees to a high standard, then remunerate them as a reward for their hard work. There is something to be admired in that.

I recall Net Present value but alas my memory has diminished how to calculate. My understanding is that positive net present value relates to the firm’s ability to generate future returns on equity greater than the cost of capital. I definitely need a refresher on how to calculate this. I cannot even fathom how to calculate the infinite possibilities relating to opportunity cost, but I can see the importance. The comparison of one decision made against another not taken can cost a firm dearly and show us how well decisions are being made. This determines the decisions made in the future and the strength of the firms’ capability to add value to an investor.

I have learned previously that judgements and assumptions can be made using depreciation and revaluation to manipulate true value. Regardless of rules and regulations, firms will always use the best filters to present the best picture. Much like a photo on Instagram, the reality may be somewhat different, but the intent is similar, the poster presents the picture they want you to see. We need to be vigilant and scrupulous to find the underlying truths.