A Thought About Investing - Where to Focus

I awoke this Sunday morning with a thought:

When making investment decisions, most people concentrate on financial statements - the things which populate analysts' reports and snapshots on financial web sites.  In doing so, they ignore that:

Financials are the result - not the cause - of successful enterprises.  

In my view, the best opportunities for outsized financial gains are associated with new and growing enterprises.  At an early stage in a company's life cycle, one needs to focus on things other than financial metrics:

Management

It's all about people.  The attributes I look for:

• "muddy boots" experience
• track record of achievement in growing businesses
• ethical behaviour
• strength of the board of directors and connections with sector
• ability to manage money wisely (e.g. to stretch dollars, to secure financing in ways that are kindly to the future of the business)

Product/service

This is secondary in importance.  Ideas are a dime a dozen.  I look for concepts which are understandable and which can be sculpted into money-making products/services with the following attributes:

• confer a definable benefit to consumers
• represent a competitive advantage over other providers
• are scalable 
•  are protected from competitors through patents or other means
• are likely to have a "market life" of more than ten years

The most successful investments in my portfolios were the result of following this approach: Silver Wheaton (a new business model), Questor Technologies (new technology taken to the market by outstanding management).  CO2 GRO, a new member of the crew demonstrates the importance of management: how a moribund company was transformed into a vibrant enterprise by an individual who had the foresight and skill to see new possibilities for the company's technology and deliver it to the market place.  

It takes time for young companies to realize financial returns and for these to be expressed in the usual financial metrics.  After I established my first position with Questor, the stock price fell by half.  My patience was rewarded: a few years later it soared.   

The jury is still out on Clean Seed Capital.  Recently, the stock price tanked on news that a pending deal to purchase an equipment manufacturer had fallen through.  Further, the miserable state of the agricultural sector has created a tough environment for the sale of the company's new and expensive product.  My view: the acorn is in the ground ... in time it may grow and strengthen into a healthy tree.  The process will take years.