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Defining a good business

Sunday, January 7, 2018

People who invest generally believe that they have found a vehicle (a business) capable of providing sufficient returns on their invested capital.

Truthfully, making judgements about how “good” a business is, is perhaps one of the toughest decisions an investor will have to make.

The notion of “good” to begin with is highly subjective and can be confirmed or refuted from person to person - even when looking at the same information.

So what then, is a good business?

Broadly speaking, a good business is one that is blessed with good economics that can be purchased at a good price with the likelihood of producing good/great returns over time.

By that definition, finding good businesses requires the intersection of multiple factors - no easy feat.

That said, there are instances when the prices of businesses with poor economics make them attractive buys - though not necessarily “good” businesses in a traditional sense (Warren Buffett refers to these as “cigar butt” businesses)

Choosing these type of businesses however offers no end of hazards and potentially, quite limited upside.

Ultimately, however, a good business can also be viewed as one that is able to take in a dollar of investable capital and generate something more than a dollar consistently and sustainably.

To complicate matters, measuring the performance and potential of a business is a complex endeavor - the metrics used to do so depend on who is measuring what.

For example, if we focus on the market dominance of a business, as a barometer for assessing its “goodness”, then we must clearly define those markets.

If we focus on financial performance, then a decision has to be made on which specific measures should be used and why (returns to shareholders or cash flows?, market returns or accounting measures?)

One thing is clear though: a good business produces strong financial performance over time.

In the end, well-defined business model, competently executed will always remain the foundation upon which good businesses are built.

Andre Worrell


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