Keeping Greed out of Your Investing

We all have our own investment strategies, I’m not here to tell you what works best and what sucks wind, but one thing I do know, if your investing strategy involves greed you will probably ‘lose’ more often than you ‘win’. It’s certainly not always an easy thing, to keep greed out of your investments, especially when you’re in a stock that’s on a nice uphill ride. Any prudent investment approach should contain some form of an exit strategy, simply put how you plan on getting out of (selling) the stock you hold. This would be one way to avoid greed, have a set price at which you intend on selling the stock, walk away with the money in your pocket and move on to the next investment. Not always as easy as it sounds though is it? Prior to buying into a stock you should have some sort of idea at what price you would like to sell it, hopefully you don’t have to hold it for 10 years in order for it to reach that price. Sometimes you buy into it and if you timed it just right, you start to see the price go up sooner rather than later. When you start counting the dollars you are making seems to be when the exit strategy flies out the window and greed comes creeping in. I mean, gee, who knew when you bought it that the stock was going to rise so high, so fast, why sell now when you could make so much more money? It would be downright silly to get out now when you could clearly make much more cash if you held on to it. Somewhere deep within your being, there should be something rejecting this argument, and reminding you of your exit strategy and how you’ve gone past the price you told yourself you were going to be out of that stock and onto the next one.

Take your profits when you can

Discipline is a big factor when investing in the stock market. By employing some self-discipline you can keep your head about your initial investment strategy and keep greed from banging down the door. If the stock you invested in has made a nice move, and you have made the money you hoped to make off of it, then get out of it while the getting is good. If it seems as though the price is going to continue to increase, then why not take out your original investment plus a small profit (if possible) and leave the rest. At least you wouldn’t be losing any money by taking your profits when they are presented to you. You could have the best of both worlds if you chose to employ this strategy, you made your money (or at least didn’t lose any) and if the stock goes to the moon you’ll be laughing all the way to the bank, or at least to your next investment. The other option, let greed take the wheel, you could make way more money if you don’t take any profits and let the whole thing ride up the hill. Sure, you could stand to make a lot more off of your investments and I’m sure many people do, but the problem with this approach, where is the top? And when it reaches the top is it going to stay there for a while or come crashing down at record speed? What if it reaches this peak while you’re on vacation, or sick and can’t get to your computer to make the all important trade? It’s amazing how fast all those profits can disappear and you are no further ahead then when you first invested in the stock.

The main point to all this? Greed has a home and a mother, just like the ugly duckling, just perhaps not in stock market investing. Obviously, investment strategies vary from person to person, and if you find one that works, and greed is a big factor, well, kudos to you, personally, I’ve never gained off my greediness, it’s always hurt me more than helped me. Anyways, now back to my point. No one can predict with 100% certainty (no one I’ve ever heard of anyways) what is going to happen with a particular stock or the stock market in general. If you are able to keep your head about your investments and keep greed out, you could stand to make some tidy profits so that you can keep investing, employing your investment strategy and hopefully making some decent money at the whole thing.

*Any information contained in this article should not be construed as investment advice, simply the thoughts and opinions of the author.*

Many business owners are reluctant to hire an independent valuation professional to conduct an initial valuation of the company (let alone an annual valuation) if they do not perceive the need for one. In many cases, there is little perceived need for the owner of a very small business to have a valuation performed, unless of course the owner plans to leave the business to children, needs a loan from a bank when the company’s assets alone cannot support the loan, or seeks to sell all or part of the business. These business owners often are individuals who have started or acquired a “lifestyle” business-a business that provides the owner with a job and enables the owner to maintain their desired lifestyle. The lifestyle business could be thought of as a hobby for the business owner-a hobby that earns the owner money.

As compared to a lifestyle firm, some entrepreneurs seek to establish a transgenerational enterprise-a firm that is skillfully managed to create long-term value and wealth for successive generations. These firms typically exhibit the same seven characteristics of successful transgenerational enterprises-a compelling vision, professionalized management team, a long-term ownership plan/strategy, effective communication, good corporate governance, a clear succession plan, and a comprehensive strategic plan. As a result of the need to ensure and evaluate successful creation of transgenerational wealth, many privately-held and family-owned businesses, particularly those that have survived multiple generational transfers, have instituted a policy of having an independent business appraiser/financial analyst conduct an annual valuation of the firm.

Many firms of various sizes and different phases of the corporate life cycle have recognized the benefits of having an annual valuation conducted. The most commonly cited benefits of an annual valuation policy include the following:

• Accountability and Performance-An annual valuation of a privately-held firm enables the shareholders to see the value that is being consistently created or destroyed by the management of the firm in its execution of the corporate strategic plan. Over time, if the executive management of the firm consistently fails to create value through the increase in the estimated fair market value of the company’s shares, the shareholders may seek to replace the management team with a group more capable of executing the strategy and creating value for the shareholders. In addition, an annual valuation may enable the shareholders to identify the need for substantial change to the strategic plan if that plan consistently fails to create the level of value anticipated. Overall, the annual valuation promotes accountability and provides clear performance measurement.

• Estate Planning Purposes-Many shareholders in privately-held transgenerational enterprises have on-going estate planning strategies aimed at protecting wealth for heirs. As part of an estate plan, a shareholder may periodically place shares into a family limited partnership whose shares are then gifted to the shareholder’s children. A shareholder may also make gifts of shares to the children each year for tax purposes. In order to facilitate this, an annual valuation of the privately-held enterprise provides the shareholders with part of the data necessary for these estate planning purposes.

• Buy-sell agreements-In multi-shareholder firms, a buy-sell agreement is an effective and practical means of establishing how the buyout of other shareholders will be conducted. Though many buy-sell agreements have a defined method or process for establishing the value of the firm’s shares, an annual valuation sets a clear precedent for the methodology used to establish the value of the shares. For those firms that do not have buy-sell agreements in place, annual valuations are a good way of avoiding (or at least, tempering) disputes that may arise when a shareholder seeks to sell his shares to the other shareholders. Whereas one time valuations can be open to criticism of bias in favor of one party or the other, an annual valuation tends to limit this accusation as the methodology has been applied consistently in previous years.

• Promotes Effective Communication-An annual valuation of a privately-held firm is an effective means of communicating value creation between the executive management, board of directors, and the shareholders of the firm. The valuation may be the catalyst for open discussion between the management and the shareholders on issues related to the strategic plan, succession plan, financial objectives, return expectations, etc. In addition, an annual valuation is a good way for the management and board of directors of the company to provide value-added services for the shareholders. This in turn can foster the creation of goodwill between the management of the firm and the shareholders, which may ultimately lower the firm’s overall cost of capital. The lower cost of capital may enable the firm to invest in value-creating projects that create long-term wealth for shareholders-projects that may have been overlooked in the past as a result of a higher cost of capital.

• Facilitate Banking-Many privately-held firms effectively utilize leverage to invest in value-creating projects. Often times, this leverage may exceed the credit available based on the firm’s fixed assets alone. In some cases, the financial institution may be willing to lend against the company’s goodwill, which is identified in the process of a formal valuation. The ability, then, of a privately-held firm to borrow based on the value of the goodwill or the value of the company’s shares may expand the universe of value-creating investment options available to the firm. In addition, the annual valuation may establish a track record of value creation which could be used to facilitate a recapitalization of the firm, enabling management to further seek value-creating projects, distribute funds to the shareholders via special dividends, etc.

• Expands the Investment Options-Privately-held firms, unlike publicly-traded counterparts, suffer from a lack of liquidity and the inability to use the company’s shares as currency when seeking acquisitions or mergers. An annual valuation that clearly establishes a trend in value creation may enable the management of the company to use the shares as acquisition currency for another privately-held company. The annual valuation is also beneficial in the shareholders’ investment decision making process with respect to maintaining the status of the company or seeking liquidity through a merger or sale of the company. The history of annual valuations may provide the shareholders with a foundation for negotiation of more favorable deal terms.

• Cost Benefit-Annual valuations may also provide the company with cost benefits as compared to one-off valuations performed every few years. Many valuation firms charge reduced fees for the annual update to a valuation as part of an ongoing valuation process for a privately-held business. For example, suppose that Triumvirate Industries, a privately-held company with $25 million in annual revenues, chooses to have a valuation performed once every five years. The valuation firm’s fee is set at $20,000 per valuation. However, suppose that Triumvirate Industries has an annual valuation conducted. Whereas the initial valuation fee may be $20,000, the subsequent annual updates are $14,000. While the fee structure varies by firm and by project, annual valuation updates typically carry a lower cost than one-off valuations.

As can be seen from the previous discussion, there are a number of benefits associated with a privately-held firm instituting an annual valuation policy. While this is most typical with large, transgenerational enterprises, privately-held firms of all sizes may derive some benefit from annual valuations-whether it relates to financing purposes, estate planning, or the enlightenment of the owners in how they are creating value within their firm. Those firms that have been most successful in creating long-term shareholder value and transgenerational wealth have exhibited seven common characteristics, as previously discussed. Those firms that have instituted annual valuation policies have likely added value to the firm from one of the previous seven benefits. In the end, the best way of measuring the value that management has created for the shareholders of a privately-held business, particularly a transgenerational enterprise, is through annual valuations conducted by an independent valuation professional.

 I will share some reflections on the state of mergers and acquisitions (M&A) market and discussions on the impact of the crisis on the M&A landscape in Ukraine.

The M&A activity in Ukraine during recent years and how is the economic recession affecting M&A activity?

Despite the crisis, 2008 was the best M&A year in Ukraine’s history, both in the value of deals and volume of transactions. The M&A market grew by 20 percent with respect to 2007, with about $9.2 billion worth of deals conducted. In contrast, we see substantially less transactions closed in the first quarter of 2009, compared to the first quarter of last year.

This trend may be reversed later in the year, but could also signal a downtrend for 2009 versus 2008. Experts in the market signal that there are many M&A dialogues ongoing and the necessity to sell or restructure businesses is more pressing because of the crisis environment. The crisis is putting a lot of pressure on some companies. There is expectations amongst financial players that by the end of this year the number of transactions will have an upswing while the average deal value will be lower than 2008.

A crisis can be supportive to a certain category of M&A activity. Before the crisis, mergers and acquisitions were driven by foreign investment into Ukraine, which was seen as a promising emerging market. Now, M&A activity is more focused and may become more domestic driven on distressed companies or companies with liquidity needs but no access to the debt and equity markets. The crisis typically forces the business community to think harder about M&A options as a strategic tool to solve challenges, than a bull market does.

M&A deals ongoing in certain sectors

There are broad M&A activities ongoing now for the aforementioned reasons. In the banking sector we see some activity due to the current recapitalization needs. High levels of leverage are forcing parts of retail sector to restructure. Overall, consumer sectors will remain active for the simple reason that hryvnia devaluation is making most imports unsustainable. Companies with substantial imported goods before the crisis might look to buy domestic production to avoid the currency volatility. The agriculture sector is doing reasonably well due to capital need to meet both domestic but also international needs for products from this sector.

Valuations for Ukrainian assets have plunged

Valuations of assets have clearly taken a beating. The drop is driven by both the global environment and sector specific elements. In the financial sector, for example, valuations have dropped 70 to 80 percent. For consumer companies, it’s probably closer to 30-40 percent. Ukrainian valuations in the middle of 2008 were inflated, probably by as much as 30-35 percent. It was a premium which was not justifiable by the underlying drivers or structure of the Ukrainian economy at that time. Investors as well as financial institutions offering these assets underestimated or ignored the structural weaknesses of the economy, the lack of political unity and weak infrastructure.

Invest or wait?

This is the strategically right time for investment into Ukrainian assets. There are obviously risks but valuations are lower and assets are more available and there is larger competition to get hold of investors money, and this should drive the values down as well. At the same time, the mid-term prospects for Ukraine remain strong. In the near term, valuations will go up, in particular for those companies that will come out of the crisis stronger and especially after the global economy picks up, and when the elections are over. Said this, there is always a need to sort out the bad deals from the good ones. Transparency combined with underlying assets foundation is always good to look for when doing a deal in Ukraine. All too often deals are made on a too weak due diligence of the asset and its operations and ownerships, and fail from this.

Sectors to focus on

As stated above, finance, consumer related businesses and agribusiness are sectors on the top shelf at the moment. Emerging new energy companies would also be a strategically sound investment approach if you are in for the longer haul. Invest in sectors that are less export-oriented and in those companies that are focused domestic. Look at sectors where companies have steady cash flows and low debt levels.

M&A advisers in Ukraine

The Ukrainian M&A advisory market is still immature with not too many serious internationally experienced players in it. In general, there are mainly London-based banks with small operations or no operations in Kyiv and a number of local players with a business model historically built on a brokerage approach. Some few advisor companies have dedicated team based in Ukraine with international market deal experience. These latter ones are more willing to share the transaction risks with investors. This makes it easier to get investors to trust advices given, as the advisors take part of the risk in a deal as well.There is a broad variety of fee structures that are applied, fees are now more linked to the valuations that could be achieved combined with a fixed-fee component.

Do i recommend some advisors, certainly i do, give me a signal and i will share them with you, contact me at sak@ec-ba.com

You can also read more about me at www.ec-ba.com

Institutions such as the Central Bank, the IMF, and our own banks such as AIB have all painted gloomy growth, or rather contraction, forcasts for Ireland. A central point is that Irelands recovery is heavily dependent on global economic recovery, and so somewhat out of our control.

Deflationary pressures have already slashed values of various asset classes, especially in the property market. However, these pressures will be sustained as the world’s economies enter into a cycle of falling prices of consumer goods and services. Given that deflation negatively affects household income, corporate profits, asset values, and the overall economic growth, it will be necessary to show prudence when making investment decisions in the current market. In fact, for deflation, there is only one right investment choice: preserving capital.

In deflationary times, the overall investment strategy should be focused on the preservation of wealth rather than on the creation of wealth. Moreover, the goal is to concentrate holdings in safe assets rather that to diversify them across sectors and markets. This conservative approach means steering away from equities, commodities, and high-yield fixed income securities, even from traditionally conservative investments such as property and managed funds, and focusing on safe liquid investments, such as cash and bonds, which do not necessarily produce high returns.

In fact, deflationary times give true meaning to the cliché cash is king. This is so because, by definition, deflation means that the value of your money increases as the price of goods and services declines. There are also other liquid (cash-like) investment instruments, such as certificates of deposit and money market funds, which would preserve your wealth from losses propped up by deflation.

Bonds are also an option. However, investing in bonds when deflation is coupled by financial distresses and the possibility of an extended economic downturn warrants caution in respect to bond issuer creditworthiness. The likelihood of default on certain types of government securities (particularly municipal bonds) and corporate bonds is heightened in the current situation in which corporate bankruptcies, especially in some sectors such as auto industry, are rising. Therefore, one should be very selective when opting for bonds, particularly corporate bonds, making sure that securities with the lowest probability of default are selected. Treasury bonds are the safest investment choice.

Certain undervalued equities may also offer some long-term value. For those who maintain investment positions in equities with a long-term perspective, sectors that could offer some relative security from the generally declining stock market include infrastructure construction-related sectors, consumer staples, healthcare, and utilities such as electric power companies.

However, with this investment strategy one may view deflation as an economic process that reduces opportunities to maximize wealth creation. Quite the contrary! Conservative investment choices in deflationary times preserve wealth from losses and secure capital for the time when high-return opportunities re-emerge. In fact, deflations are the precursors of investment opportunities that will follow it. These opportunities, when identified properly, may offer substantial long-term returns that will assure optimal long-term investment performance. Still, while the coming deflation may not last long, it will take a while before the economy charges ahead again. It will be necessary to clean some of the excesses accumulated during the largest asset bubble in the economic history of the modern world before good investment opportunities sprout again.

This cleansing process is where the National Asset Management Agency (NAMA) needs to make the correct decisions, on behalf of the Irish taxpayer, in order to maximise long-term sustainable growth. Heres hoping…