There are zillions of investing strategies. Some good, some bad, and some are just…. Everybody knows why they are investing. Correct? Well, let's invert this and ask ourselves what efficient investing can give us in return. This is where the 4 M's can drastically improve your net worth if you or whoever manages your money does their homework correctly.
The 4 M's
- Meaning: You've got to understand the business.
How many of you have mutual funds, stocks, and/or other investments? Now for the easy question: Why are you in these and what do you know about the underlying businesses? If your answer is, "My significant other's pet's hairdresser said to do it," um, this would be the time to dig deeper and get in touch with a competent advisor who not only understands the investment but can also get your required ROI or MARR (Minimum Acceptable Rate of Return) out of it.
- Moat: Your business has to have a strong moat or it won't be able to sustain long-term growth through all sorts of economic ups and downs.
Just like a real castle, a moat protects the business from invaders (competition). A moat must have a durable and viable economic advantage. Otherwise, the business may not be worthy of our hard-earned cash. Think about it. Why would anyone invest in a business that is unable to provide us with an acceptable value? Heck, if all you want to do is spend money so your garage stays full, how will you pay for the garage?
- Management: If they are honest and passionate, then you should be hearing about long-term plans and estimates in their discussions with analysts, shareholders, and others.
Are their expectations for future earnings reasonable or seriously deranged? We want reasonable. Compare their estimates with your own. If theirs are lower than yours are, you might want to rethink yours. Nobody wants to work for free. What is senior leadership paying us in return for our trust in their abilities?
- MOS (Margin of Safety): Now, you can do the valuation on the business. Not before.
You can't just take a shot in the dark based purely on recent growth (or losses) or analysts' valuations. You have to understand the value of what you are thinking of investing in.
When you have done a great valuation of this investment, compare it to the professional analysts and other investments that meet your criteria. We love to use "Rule #1" investing, which means don't lose money. So, consider how great you think your valuation prowess to be, and then discount this by 50% as a margin of safety. Why, you ask? Ever heard of the Titanic? Best investment in its class until…. Things can still go down like a brick and, if they do, you want to be wolfing down your favorite business as it drops. To do that without freaking out, you have to know that you have a good handle on the long-term value of this business as a business.
Bottom line, folks: This is a great market for people who know what they are doing. You can do this yourself or you can hire someone competent to do it for you. Whatever you decide, ask questions, get answers, and keep asking more questions until you understand the answers to your satisfaction. The 4 M's get us to a wonderful investment at an attractive price, so before investing any of your hard-earned money, do lots of research to ensure the investment meets your 4M criteria.
It's not what you make; it's what you keep that determines your lifestyle.