Africa-Press – South-Africa. Jargon, lingo and acronyms can be overwhelming. For the average person, Hannes Viljoen unpacks the basics.
It is not only a characteristic of big corporates. Jargon, lingo and acronyms are a feature anywhere that people want to reflect their perceived intellect. Sometimes, the terms are useful and specific descriptors. Other times, they facilitate exclusion.
In terms of investment, you’ll find in many a discussion the following acronyms and more: P/E ratio, P/B ratio, DCF model, EBT, EBIT, EBITDA, and even EBITDAR, EV/EBITDA, IRR, NPV, EPS, NOPAT, ROA, ROE, ROIC, ROI… you get the point, and more acronyms won’t strengthen it.
There’s also lingo aplenty: value investing, growth investing, quality, growth at reasonable price, earnings revision, bottom-up investing, top-down investing, fundamental, technical, data driven, evidence based…with new styles being invented on a regular basis to infer differentiation.
All names of an investment-bird.
At a recent conference, a portfolio manager noted that he believes this is a good time to invest in “good-quality companies with good cash flow characteristics” and I wondered to myself: when is it a good time to invest in bad-quality companies with poor cash flow characteristics?
What does the term investing, or investment, really mean?
Perhaps the best starting point is to once again follow the advice of billionaire Charlie Munger: to “invert, always invert”. What is not considered investing? Or what is the opposite of investing?
The answer here is simple, speculating. So what is speculating?
If you buy something, with the hope of selling it in the near future for a higher price than you bought it at, you are speculating that someone will come by, with the same hopes and ideas, as you! That is quite often how ‘bubbles’ are born.
If you buy something, without understanding how the value of the ‘something’ is determined or created or derived, you are speculating. The Cambridge Dictionary defines speculating as “to form opinions about something without having the necessary information or facts; to make guesses”. I am not referring to placing your faith in bitcoin here, because me having an opinion on the matter would be a guess, I would be speculating, but I am referring to acting on a hot stock tip from someone on CNBC or a co-parent next to the sports field.
To the contrary then, is it only considered investing if you have all the data and all the information before you make a decision? We make decisions on a daily basis with a limited amount of data about the future that is inherently uncertain, so the answer is a resounding, no.
Investing is the provision of capital to a company in exchange for a share in the firm, you are literally purchasing a portion of a firm. You provide the capital because you believe the said company would be able to use the capital to further their reason for being (whether it is to design and manufacture an iPhone or put the infrastructure in place to render a service), with the objective of making a profit or earning a return on your investment. If you have invested in a company that was able to manufacture and sell its product or service for more than what it cost to make or provide it, you made a positive return on your investment, the value of your capital committed has increased. If you do this for the long term, you are investing because you are invested in the long-term prospects of the firm.
If you have found this company, and the management has the ability to increase the value of your capital over time, on a consistent basis, would you ask them for your money back? No! you would let them do their thing and if they are able to keep on increasing the value of your capital year on year on year, the value of your original capital will keep on compounding until it is a handsome sum.
Should you one day need your capital, plus return, back, because you are no longer helping other people earn a return on their capital through providing value at the company you are working, you can withdraw your capital (if there is a willing buyer).
If you ‘commit’ your capital only for a short period of time, hoping it is good few months for the company, you are speculating. It can be a good few months, but also a bad few. You don’t know. You are guessing.
If you don’t know what product the company is making, but heard it is a good one, whatever it is, next to the sport field and you are willing to throw some funds in the ring in a hope you will be able to withdraw more, you are speculating.
I like birds. I would be very satisfied with myself if I knew all the names of every bird in South Africa, much less the world. But I enjoy it much more to know and tell my kids, in detail – even though much of the time they are not listening – about a smaller number of birds and their habits, habitat and other characteristics. And, in what Mr Buffet would call the “circle of competence”, this is arguably more useful to them, too.
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