Council Post: Looking At The Metrics That Really Matter While Avoiding Pride And Prejudice In Investing

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Stuart Jackson is partner and former Global Managing Partner at the strategy consulting firm LEK Consulting

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fifteen years ago, in my book where the value hidesIn this article, I introduced the concept of strategic market positioning. The idea behind it is that to understand a business’s true prospects, you shouldn’t just look at the crude metrics of scale versus competitors. Instead, you need to look at market share and relative scale that take into account what the competitive advantage is in each industry. This is what measures strategic market positioning. For example, in the airline industry, competitive advantage is driven less by global market share and more by the share of regional hubs or city pairs which leads to better operational efficiencies and higher preference from consumers. Strategic market positioning takes those industry-specific factors into account.

The book’s goal, and the concept of strategic market positioning, was to help CEOs understand and identify untapped opportunities within their portfolio of business units, channels, and product lines so that they can direct investments toward the highest returns.

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But the concept can also be applied to investing in equities, and, in the book, I compared some well-known rivals: Walmart vs. Kmart, Nintendo vs. Sega, BMW vs. Daimler, AMETEK vs. Magnatec, Southwest vs. Americawest.

Fifteen years later, I thought it would be interesting to look back at the total shareholder return (dividend plus price appreciation) for the companies that I highlighted as winners in 2006. I calculated total shareholder return based on dividends and share price appreciation — reported by S&P Capital IQ — between October 2006 and September 2021.

Starting with investing one share and adding up all the shares received from dividend reinvestment (reinvested at the closing price on the day they were paid out), I then rounded up the number of shares to the closing price on 9/29/2021. multiplied by. total value. From there, the initial value of the share was subtracted and then divided by the same amount before multiplying by 100 to get the percentage.

From 2007-21, my calculations showed that the “winners” saw an estimated total shareholder return:

• Walmart – 287%

• Nintendo – 185%

• BMW – 99%

• AMETEK – 980%

• Southwest Airlines – 238%

Those five companies averaged 378% and the S&P 500 averaged 227%.

There’s good news and bad news. I’m proud to say that my picks performed well above the market average, and the “winners” I highlighted continued to do well against their competitors, some of which no longer exist.

But in truth, putting my pride aside, I feel compelled to admit that I was completely taken aback by AMETEK’s performance. In the book, I shed light on their electric motors division and the fact that the company has a knack for creating market leadership and a competitive advantage in market segments that even competitors don’t understand. Since then, the company has refined this skill into a repeatable corporate capability, expanding into new areas of automation and precise motion control and advanced analytical, test and measurement equipment for the aerospace, medical, energy and industrial markets. Building an enthusiastic portfolio of, (Full disclosure: AMETEK has been a long-term client of LEK Consulting.)

what did I miss? I missed out on not putting too much emphasis on technology investment. This was partly educational – I was looking for clear teaching examples, and easy to understand and explain traditional occupations. But I was also prejudiced in trying to force emerging technology businesses into the old technology framework.

For example, in mid-2017, Tesla was manufacturing cars at a rate of 100,000 per year and was incurring a hemorrhaging $1.6 billion per year. I asked, could a company losing money that makes a fiftieth of the number of vehicles per year as Honda, could have a market capitalization of $70 billion compared to Honda’s $50 billion? The answer is that I was guilty of looking at the wrong metric when considering scale and competitive advantage (exactly what I warned against doing in my book).

At the time, Tesla accounted for 90% of the electric vehicles sold. Electric vehicles are the future. Scale is irrelevant at best in traditional vehicle production, and may be a boat anchor rather than a benefit – as made clear by the union’s recent demand for no job cuts at Volkswagen.

Understanding strategic market positioning and competitive advantage can be a powerful tool, but with the accelerated rate of technology adoption we are now seeing, it is essential to pay a lot of attention to how it is implemented. Avoid the pride of thinking that old, generic metrics can capture the dynamics of specific industries. Let go of the bias of interpreting emerging-industry performance the same way you model mature, stable, established industries and companies. Balance is essential if you are going to reap the benefits of a strategic market position and truly understand the competitive advantage of the companies in question.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.


Businesshala Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. am i eligible?


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