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business investing strategy
Inward and Outward Investment for an Expanding Horizon
Warren Buffett is quoted as saying “Risk comes from not knowing what you’re doing.” This is an ideology that our organization subscribes to in all facets of our business, especially in the management of our investment portfolio. And it is one that every business owner or manager should take to heart.
Many small to medium sized privately-held companies tend to think in terms of their profit strictly from their sales generated. But profit can be greatly increased by creating an investment portfolio and properly managing it. The purpose of this article is not to discuss the Net Present Value (“NPV”) and the subsequent Internal Rate of Return (“IRR”), but is to illustrate the categories of investments that are part of our portfolio and our investment strategy.
Create and Stick with a Solid Game Plan
One investment strategy consists of using the company’s profits and cash flow to invest in a number of categories, including:
- Equities, Bonds and Money Market Instruments
- Organic Growth Through the Establishment of Additional Core Business Units
- Acquisitions and Joint Ventures
- Opportunistic Investments
These are four categories where we focus our investments. Our strategy has been to stick to a risk/reward approach, but we are very conservative on the risk side, This is a safe approach for most business investments. Consider allocating percentages to each of the categories and then make slight adjustments over time as you see where you’re getting the best results. Our company, for example, has chosen to invest in a combination of primarily short-term instruments with a much smaller percentage in equities. Make sure that you fully understand all the areas that you are investing in, and have experts both internally and outside that assure your greatest chance of high returns with minimum risk.
Invest Where You Are in Control
There are ways to invest in your core business that can pay big dividends. Today the majority of our investment strategy surrounds acquiring and/or creating business units that are synergistic to our core business. For example, as a media, advertising, marketing and entertainment organization, one of our primary units is a production company. One of the key outside resources we used for every production was editing (post-production) facilities. Ten years ago, instead of acquiring a post-production facility--and with an outlay of less cash--we created our own facility. We knew the business pretty well, had an instant client base, and were able to reduce our production costs immediately. Our risk was very low, and for the part of the business that we didn’t fully understand, the technical side, we hired top editorial talent. This consolidated our resources, reduced outside costs and created greater value for the company as a whole.
Take Advantage of Market Trends and Opportunities
There are market trends that change the investing opportunity landscape from year to year. Be on the lookout for situations that you can leverage. For example, with the real estate crash and foreclosures hitting record levels, we felt that there was a tremendous opportunity to enter the real estate market, with potentially high returns--and a limited window of opportunity.
Another one of Warren Buffett tenets is to “Never invest in a business you cannot understand.” We have created a real estate company that invests in single family homes, using a cash-flow model with a long-investment horizon of five to seven years for our maximum return. But we found a partner who was an expert in real estate and finance. With his real estate expertise and our financial clout, we have made this venture successful, and it continues to grow through our own funding, bank and private investor financing. Its profits accrue to the corporate bottom line, and provide a new investment stream that augments our core business.
Your Overall Prospects
There is value in looking outside of traditional investment vehicles if you are building a strong foundation for the future. Investing your profits in diversified internal and external vehicles provides multiple platforms and flexibility and a hedge against single-segment downturns.
And here is one last valuable piece of investment advice that we too advocate: Paul Samuelson, the first American to win the Nobel Prize for economics, says, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, go to Las Vegas.”