The Good, the Bad, and the Lucky: Placing your bets on principles or performance, by Mark Chussil
It’s easy to tell if a business was profitable after the fact, but we have to place our investment bets before the fact. How would you know if a company is worth investing in? How would you know if a business is likely to be profitable and long-lived? Make a list of the characteristics that you believe would separate good businesses from bad. You might find good-business characteristics such as these:
- Strong market share
- Well-differentiated products
- Slightly paranoid management
- Innovative R&D and marketing
- Loyal customers
And so on. Your list may resemble or differ from that shown. Some items may or may not be on your list. For instance, scale. (Would you rather be General Motors or Porsche?) For another instance, fame or charisma. (Do you know what company makes Tabasco brand pepper sauce?) For yet another, track record. Perhaps what we call a track record reflects creating or destroying good-business characteristics. You might not put luck on the good-business list, since luck is somewhere between ephemeral and illusory. You also might not put having-ineffective-competitors on the good-business list, since that’s their characteristic, not yours, and their ineffectiveness is merely lucky for you.
What’s not on your good-business list? Surely items better suited for a bad-business list, such as complacency, denial, bureaucracy, and resistance to change.
Imagine that you found a company with all the characteristics on your good-business list. Imagine too that the company was reporting poor results. Imagine that you found a second company, one with all the characteristics on your bad-business list. Imagine too that the company was enjoying great performance. Finally, imagine that you can invest in only one of those two businesses. Which one would you choose?
If you chose the good business with poor performance, you are implicitly asserting a belief in principles. You are saying that its results will improve because its strengths, its fundamentals, are strong. Think now of how you, your colleagues, and even the media gauge the attractiveness of a business. Do you and they use good- and bad-business lists? Or are you and they unconsciously swayed by current performance?
Incidentally, extensive empirical research on the PIMS database (Profit Impact of Market Strategy) tested the very question posed above. (The PIMS database was built by the remarkable Dr. Sidney Schoeffler, founder of the Strategic Planning Institute. I worked with that database at SPI, though I did not perform the research described here.) The research showed that it’s best to bet on the good business with poor results. In other words, evidence favors the principles.