Happy first Friday of 2023! It has been a year of many ups and downs. I’ve been silent on this page for some time. Consistency is so important, and my apologies for the lack of it. I’m still navigating and defining what this new life looks like, and my writing took a backseat to living in the moment, meeting many new people, and getting back to some things that are core to who I am. It’s still a process, but I want and need to get thoughts on paper. Postings at the end of the week are my goal --long or short. I have to remind myself that short is good too.
Value Creation
Last month, I attended a value investing summit in New York City. It was the first time I had visited since the Pandemic. The city was full of vibrance, and it was good to be with like-minded investors. There is something incredibly special about value investors. They are intelligent, patient, long-term focused, kind, and good people. I met folks from around the world —India, Switzerland, the Canary Islands, and mid-market cities like San Antonio, TX, and Charlotte, NC. It was a long day with excellent speakers—but I did feel a sense of home, as odd as it may sound.
Our first speaker was Howard Marks. In a semi-small intimate setting of 80+ people, there were only good seats in that gorgeous historic location. If you need to become more familiar with Howard, read his famous letters, and take the time this weekend to read his latest letter Sea Change which he announced the day of our event. He speaks about what he sees as the next change in the markets.
While I cannot predict the next 36 months, I’m striving to Embrace Any Future that comes my way. To help me with that notion, I’ve been reading quite a bit about how we behave in similar situations. We tend to repeat patterns or ignore others as individuals, markets, and society. In other respects, what worked before won’t work now —markets have changed, businesses have changed, and people’s expectations have changed. Technology, science, extraordinary externalities, and people help to shape where we are going in the future. Like the book by Marshall Goldman (amazon link attached):
What Got You Here Won’t Get You There
What Do We Do?
Corporate and Rising Leaders - double down on understanding what drives true valuation creation for your business in responsible ways. In other words, expand your financial astuteness. Know your company’s Weighted Average Cost of Capital (WACC) and make sure your projects and efforts create real margin improvements that exceed WACC.
Responsible Growth also means freeing resources to self-fund projects, efforts, and client services where the Return on Invested Capital > Weighted Average Cost of Capital.
Understand your company’s financial position, debt rating, and cash flow. Cash is king, and cash management should be part of everyone’s job. As entrepreneurs will tell you, you know it’s job #1.
Entrepreneurs - review Operating Margins in this high-inflation environment should be one of your top priorities. Review your revenue mix, customer concentration, and payment terms. Determine if your contracts have risk-protection factors, and be on the lookout for scope creep for those in the professional services industry. On the expense side, you should be well into expense and cash management —specifically, see what costs you have in the business that are not covered by revenue. If you don’t know that, you are not alone. But now is the time to look things over and see if the cost is really needed. Does it tie to the revenue, and are customers willing to pay the unsubsidized market price for the product/service? That’s a big question to help determine if you have a product/market fit. Product-market fit happens in up-and-down markets. The real test is in down markets.
Non-Profit Leaders - have a massive handle on the organization’s true economic value to society and financial metrics and measurements. A key area, similar to entrepreneurs, is understanding the costs not covered by donations or service revenue. Build up those cash-, capital-, and Capex reserves. If we head for 24 more months of choppy waters where financial assets continue to be under pressure, this may cause funders and donors to be more cautious with donation allocations. At a minimum, there are fewer dollars for these generous organizations to allocate if they go off a percentage of their corpus.
Personal - slow the spending and build your savings. We know the Fed will keep hiking interest rates until inflation is within its target range. Indeed, a strong economy with excess cash contributes to persistent inflation. We can do our part and help J. Powell out a bit by slowing things down just enough for the Fed to ease off on continued rate hikes. In the meantime, you can start planning your next personal financial goals to prepare you for more financial flexibility and freedom. If you slow the spending and have some free time, take some of it to start planning your retirement. It’s a steep climb at first, so start early to get the first part done. Here are a few things I’ve been talking about with our clients to consider:
Save more dollars for fun and enjoyment.
Have a good handle on maintenance costs for your home and rental properties. Plan for those big purchases like you are a property manager. Eliminate the surprises that will prevent you from enjoying your future dreams.
Research Long Term Care (LTC) and secure it early. Good health and starting earlier can help you save on premiums. LTC is not just for the elderly; it can help you and your family should an unexpected medical crisis arises.
Plan to live longer than you think. With our clients, we are setting plans for 100 years. Improvements in science and medical treatments make it easy to see people living longer than their great-grandparents did. Here is a life-expectancy calculator with 13 questions on your lifestyle that will help you estimate your life expectancy. See how lifestyle changes could influence your longevity.
It’s time to create some value. A little here and there will go a long way to improve our current position and, more importantly, give us some peace of mind.
Happy New Year! Here is wishing you peace and prosperity!
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