Success and Growth

 Success is a personal expression used to describe how someone is doing at life. Some see material wealth as a sign of success, others see familial relationships as their measure of success. Its challenging to get too specific about the measurements of success because it can take so many forms. One business may be successful in some areas and completely unsuccessful in other areas. Lets take a look at some key factors for measuring success:

The first factor: Self-Satisfaction. Is this person living their purpose? Are they being authentic? Are they passionate? Do they enjoy doing their work or business activities? The most successful people are deeply self-satisfied. They have their needs met, they are inspired; they love what they do every day. This is a sign of success in my mind. A great example of this is Ray Anderson from Interface Carpet – he is an extremely self-satisfied man and is very successful in the eyes of many.

The second factor: Contribution to Greater Society. Does this product, service or business help meet the needs of society as a whole before, during and after its ‘life’? Is there value inherently present in this product or service? Are people living ‘better’, happier, more engaged lives because of this business being present in their lives? I think the impact on society, as a whole is an important factor when measuring success. If you can meet the needs of different populations and have a deep impact on improving the lives of others then one should be considered successful.

The third factor (last but not least): Sustainable Nature of the business, service or product in question. Can this product or business continue to exist and thrive under the current operation? Are finances, procurement, personnel and demand consistent? Any successful business has consistency and the ability to sustain its operations in the marketplace.

Accounting for “healthy growth” within each factor of success is an important consideration. If one is to be successful by contributing something useful to themselves and society as a whole then they need to reach people. Growth is a reflection of demand – more people wanting what you are providing means that you have a wider influence and impact on people’s lives.  What does it mean if a business, product or service is experiencing healthy or sustainable growth?

The best answer I can come up with pulls from Janine Benyus’s work in Biomimicry. She states, “We live in a competent universe. Learn from the genius of the planet & universe and ask how would nature solve this?” In relation to growth, I have observed that most babies need a lot of energy inputs and they grow relatively fast, usually leveling out after a period of time into adulthood. Upon stabilizing their growth, most organisms tend to then ready themselves for reproduction. The relationship between animals and their offspring has a wide range of variations much like that of parent companies and their subsidiaries. At a certain point, growth begins to transition into a decomposition process whereby our material make up transforms itself into a new composition. This new composition allows for the process of organism growth to start again ‘anew’. So if businesses were to look to nature for tips on sustainable growth, one could say this is a rough guide. If the factors of success are present and growth has measurable stability in its process then I feel like you could say that that company is successful overall.

Valuation

Basic Tools for Valuation

There seem to be a few prominent financial forms of valuation used in different circumstances. Below is a short list of some of these valuation methods for assessing either the value of money in the future, the payoff of an investment or valuing the stock of a company.

1. Perpetuity - A stream of equal cash flows that occur at regular intervals and last forever. Present Value = Cash flow / rate
2. Annuity - A stream of N equal cash flows paid at regular intervals. Payment has a set end time after a fixed number of payments.   
3. Discounted Free Cash Flow model - a method of valuing the total value of the firm to all investors both equity and debt holders. The biggest difference in using this model to value a firm is that you discount the free cash flow that will be paid to both debt and equity holders.

1. Enterprise Value = market value of equity + Debt - Cash
2. Market Value = Enterprise Value - Debt + Cash
3. Price Earnings Ratio = Share price / Earnings per share - “The intuition behind its use is that when you buy a stock, you are in a sense buying the rights to the firm’s future earnings.”

What does history tell us about the process of financial valuation of a firm?

John Burr Williams, the “founder of fundamental analysis” is quoted saying “the truth is that the mathematical method is a new tool of great power whose use promises to lead to notable advances in Investment analysis. Always it has been the rule in the history of science that the invention of new tools is the key to new discoveries, and we may expect the same rule to hold true in this branch of Economics as well.” (p. 278). William’s book Theory of investment value was written in 1938 and marked the beginning of the use of formal analytical mathematical methods in finance.

I found it unsettling when Williams refers to using mathematical methods in finance as an ‘invention’ of a new tool. While this is may be true, I question if it is ethical to be doing? Most mathematicians will tell you that math is not an ‘invention’ it is merely a discovery of an existing and provable set of interconnected universal laws. Laws pertaining to the functions of our universe like gravity or matter. When using mathematics to figure out something as mysterious and unproven as the value of something I feel there is subtle level of subjective manipulation occurring. Unlike the mathematics that prove the existence of gravity, we still struggle to account for the full value of things on this planet.  There are so many assumptions that must be made in order for one number to represent or mean anything in relation to a firm’s value that it makes valuation less of a mathematical process and more of a judgment call. 

This brings me to the heart of valuation, the art of making assumptions. I turn to a major Investment Nerd, Douglas Kehring, who explains the process behind valuing a company and readying it for the market (p. 292 Interview) He notes that, once they want to try and acquire a company, they “Negotiate the price point with the seller - that’s where the art comes into play. Our DCF (Discount Cash Flow) Analysis is the most important part in justifying the value.” Typically they use 5 year DCFs and he explains that the hardest part of the analysis is in determining the inputs, “assumptions are key” he says. They also take into account the income statement and breakeven valuations so they can get a hold on a firms current standing.

As we move forward into a more sustainable, profitable and accountable world, I feel like the process involved in making assumptions is our biggest point of leverage. If we can begin to make assumptions that account for the value of our planetary capital, social and human capital as well as our manufactured and financial capital then we could really start to get closer to true valuations. Of course there are plenty of forecasters and investment firms that know how to play the game of valuation and make the proper assumptions but is there work truly reflective of the value of the firms they examine? We have a lot of room to evolve our process for valuation and I look forward to a day when we can account for a firm’s value beyond financial performance.