Fundamentalism and Fundamentals

Merriam-Webster defines fundamentalism as a 20^th century Protestantism movement emphasizing the literally interpreted Bible as fundamental to Christian life and teaching.  This is similar to Islamic teaching, assuming we substitute “Bible” with “Koran,” the book of sacred writings used in the Muslim religion.

The dictionary adds “the beliefs of this movement, adherence to such beliefs” and/or “attitude stressing strict and literal adherence to a set of basic principles.”

Ancient stories of ghosts, spirits, goblins and other superheroes don’t impress me much!

So…  I’m going to write about business.  More specifically, business fundamentals.

Huh?

The strict and literal adherence to a basic set of business principles:  valuation and earnings!

Merriam-Webster defines fundamentals as “forming or relating to the most important part of something.”

In business management strategy, managing business fundamentals usually implies a dedicated focus on valuation and earnings, also referred to sometimes as “market cap” (or value) and “EBITDA.”

We’ve all probably seen CEOs who - regrettably - focus on managing business fundamentals as described above, seemingly oblivious to the state of disrepair of their corporation, or where they are headed.  In making this statement, I’m implying that some business leaders are focused on managing fundamentals only, or primarily.

The challenge in this regard is that an organization exists because of the sum total of all its parts! Not because of financial results, which is an output derived from the collective input of the employees, and the products/services that the business offers!

Simple questions for business leaders to ask of themselves should include:

Are we attracting AND retaining our most valuable employees?

- We should ensure that under-performing employees are culled regularly, allowing them to succeed elsewhere.  Does this mean that top-performing employees, who quit, have culled us?

- Do we view compensation as our only/primary investment in our employees, ignoring competitive market forces, employee work-life balance and general employee satisfaction?

- Are we growing organically, or simply replacing some departing clients with some new clients?

- Are we operationally sound, and reinvesting in our own infrastructure to support the business?

- Are our competitors out-maneuvering us on the innovation front; are we even still competitive?

I could go on and on, but I think you get the picture.

The CEO who devotedly focuses on managing business fundamentals is also often completely oblivious to employee EQ and SQ (and other psychological traits).  Not uncommonly, “business fundamentals” practitioners are frequently entirely absent generally good communication skills.  One can observe this in their interaction with others, their written style and delivery, presentation style, etc.

Of course, the opposite of the above may be true as well.  Very frequently the best orators are the poorest business strategy executioners.  Think of your favorite politician (I’ll resist the temptation to lead with an example).  Politicians are exactly the opposite of business managers, focused on fundamentals.

Politicians generally get elected because they tell good stories; motivate people, successfully sell hope, etc. Hardly anyone can under-perform a politician in terms of execution.  In fact, sometimes politicians can be outperformed by anyone else, by simply arriving!

If your CEO’s best virtue happens to be his/her political skills, your business is in trouble.  But if, on the other hand, your CEO’s best virtue happens to be a laser-like focus on business fundamentals (only), your business may also be doomed in time.

In the instance of the latter example, it will simply take a little longer for the soft business underbelly to be exposed, because fundamentals can look good on paper, reporting period after reporting period… for quite considerable time!

A good CEO, regardless of the size and type of ship he/she is captaining, needs to represent a fine balance between the bookends described above:  Not overly political, and also not narrowly, primarily focused on business fundamentals.

Think of your boss, or her boss. 

Then, think of you, where you are at, and where you are headed! 

As usual, any real change… begins with you!

How The Other Half Lives

Unfortunately, everything in life seems to revolve around money.  It doesn’t help that most of us – as first world humans anyway – tend to measure success in monetary terms, e.g. the size of your house, the fancy car you drive, etc. 

So-called designer labels exacerbate this problem, serving to further illustrate achievement of wealth and/or success, regardless of the actual, underlying facts.

In a previous blog post I shared that my sales manager picked up the tab for an overnight hotel stay during a weekend sales trip, years ago.  A reward for sales achievement.  Writing that got me thinking… higher level… does it seem unfair that wealthier people end up paying less for stuff than poorer people?

The cost of a hotel room for one night was probably inexpensive back then, but it didn’t cost me anything. 

Or - in other words - the sales rep with the highest earnings also enjoyed a paid-for-by-someone-else hotel room.  Colleagues who hadn’t sold anything on that same trip would have had to pay their own accommodation (or sleep in the car and use my hotel room shower).

Think about the information shared above for a minute.   If you were to buy something expensive - say, a fancy car - chances are that a rich person driving the same model/type of car, paid less for it than you did.

Their cost of borrowing is likely less than yours, for a loan, like a mortgage.  Their FICO credit score may be better than yours.  Greater wealth generally creates more/better opportunities to leverage (borrow) at lower rates.  That’s regardless of the fact that they may not even have needed to borrow money in the first place.

You see, rich people usually only borrow money to make more money (i.e. return on investment achieved), or to offset/defer current tax expenses for a future period.

Poor people borrow money to buy stuff they shouldn’t buy and cannot afford; usually cars and a house. Hopefully poorer people aren’t using credit cards to buy stuff they cannot afford… because that’s just plain stupid!  And a primary reason why the rich get richer and the poor get… well, poorer!

Having access to money, allows wealthy investors to make more money; sometimes without having to take too much risk at all.

Here’s an example:

Let’s assume that you want to invest in an “AA Rated” company bond that offers a semi-annual coupon rate of 6% annually.  Available to anyone for investment.

A typical, average retiree would be required to make this investment using his/her personal, hard-earned savings.  The return in my example above is predictable.  The investment risk includes default as a possible worst-case scenario; resulting in lost capital, in addition to the lost, future return on investment (opportunity cost.)

That’s only one reason to diversify!

But what about the 1%ers?

Well… they play in a different sandbox, in case you hadn’t noticed.

A private banker may help them to assess investment risk; tap into substantial bank resources to determine the quality of the offering; viability and sustainability of the corporation making the bond offering; and more.  Then - at the current interest rates - the banker may lend the client the entire amount required for investment to the client at e.g. 2% interest + a 1% management fee.  Total cost 3%.  The wealthy investor can therefore end up making 3% annually (pre-tax), using other people’s money.

Whose money is this other people’s money?  Well, banks can currently borrow money from the Fed at 0%, but they don’t even really have to do that.  The same bank may be offering small depositors (savings accounts) interest at a fractional rate, e.g. 0.1%.  Meaning… the bank already has poor people’s cash in hand, ready, and awaiting investment!

The example above is likely not available to you as an investment option, because you may not be able to qualify for a multi-million dollar loan.

In my example then, what does a rich person do with his/her own cash available for investment?  Well, in general, probably something like: (1) either viewing it as cash awaiting investment to buy assets cheap, like an investment property in the instance of 3D scenarios (death, divorce and/or debt); or (2) to buy toys, e.g. cars and/or yachts (because they are able to generate passive income using other people’s money.)

Of course, there are many more investment vehicles available to all investors, but the above is intended to demonstrate how the rules and opportunities don’t apply equally to all investors, small and large.

The real message in this blog post should not be lost on readers:  Firstly, know that wealth is a relative concept.  If you're happy and in good health, you're already wealthy!  More importantly, live within your means, cut (or ensure that you’re able to manage) your debt, and save/invest as if your future depends on it… because it does.