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Understanding the game

Published: 
Sunday, December 10, 2017

Being a successful investor oftentimes means finding good businesses capable of producing strong financial performances over time.

For most companies, this isn’t easy: solid long-term financial performance requires tremendous hard work.

It also involves a well-defined business model capable of being successfully executed thus generating healthy profits and adding to a company’s overall economic worth.

It stands to reason that an investor’s work boils down to assessing the quality of the company’s business model, and the skills and talent of its management team to monetise it.

Company’s tend to do well when they boast two essential qualities: desirability and distinctiveness of products.

If these two factors are absent, most companies will face an uphill battle.

Even if there is some measure of desirability, it does little good if the company’s products are not sufficiently distinct from others in the market.

Thus, in order to support an investment belief that a company is a worthwhile investment, an investor must try to understand and make judgements about the robustness of a company’s business model.

It goes without saying as well, that an assessment of an investment’s merit also requires and assessment of the architects of a company’s business model (the leaders and entrepreneurs) and the operators to whom effective execution falls.

Put differently, business model don’t execute themselves.

People build, run, refine and improve them.

It would therefore be analytically incomplete to assess business models without factoring the roles of manager and executives.All told, if the model is not clear, or if it is clear but there are fundamental

weaknesses in the ability of those charged to execute and monetize it, an investor should naturally apply a measure of caution when approaching such a company.

It stands to reason therefore, that “understanding the game” involves knowing both the players and the terrain.

Andre Worrell