What is the Value Proposition of the Investment?
Is it important that value be delivered to the marketplace when you’re considering investing in a company or enterprise? Do you understand what value is being delivered to the market and why that value is beneficial to others?
These are important questions that are too often ignored by investors. Too often we get mesmerized by an incredible story whether it be the frantic pace at which something has been growing or the amazing sophistication an idea seems to have, or something else which fills the mind with dollar signs.
A far more important consideration is whether or not you have a clear understanding of how a particular investment is delivering value. Markets can be delusional for periods of time, but will always come back (and then some) to normal valuations. If you’re looking to invest with a company that delivers tremendous value to the marketplace or if you’re looking to take on a project that you believe will turn a profit, or anything in between, understanding the value proposition is key.
Let’s give a couple examples:
1) Let’s say it’s 1999 and you’re trying to decide between investing in the newest Dot.com rage company or investing in Microsoft. Microsoft seems boring because it’s just doing what it’s always done. Dot.com is an amazing story because it’s a hot idea and the whole world is going to be different in this new internet age.
a. Well, we know that Microsoft delivers value to the marketplace by providing software that allows almost all users of computers the ability to actually use the computer they own to be productive. This is a huge value proposition.
b. But no one wants to talk about this because Dot.com is so hot. The question to ask is…Exactly what value is Dot.com delivering to the marketplace and why are people going to want to pay for it? There were all kinds of stories in those days about why the old rules didn’t apply, but because investors did not ask themselves exactly what value was being delivered, they lost.
This is Part 7 in the series Investment Due Diligence. To continue with this series, click on Pt 8. To use this as a growth tool to better understand your own calling, you might start by reading Part 1, Pt 2, Pt 3, Pt 4, Pt 5 and Pt 6.