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1/ If you own a business and are deciding whether to hire software developers to create a new service you are making a capital allocation decision. You must determine whether the present value of the long-term cash flows from the investment exceeds the relevant costs.
2/ Passing the NPV test means that $1 invested in the business is worth more than $1 in the market. Just passing the NPV test isn& #39;t enough to be a wise decision since a business owner should seek the most attractive opportunity of all the opportunities that are available.
3/ All capital has an opportunity cost – what you can do as the next best alternative. It is your second best alternative that determines your opportunity cost as the owner of the business. The specific business owner& #39;s alternatives are what matter.
4/ Because human error, bad luck, or volatility in a complex, unpredictable and rapidly changing world may result in a mistake, a business owner should include a margin of safety before investing and stay within their own circle of competence, which may or may not include tech.
5/ The process described in this thread is value investing as a bottoms-up *analytical style*. This style has nothing to do with investing using statistical factors based on an analysis of large numbers of stocks or whether an asset is historically cheap based on a a ratio.
6/ If there& #39;s another way business owners should be making capital allocation decisions I& #39;d like to hear it. A business isn& #39;t an annuity- predicting future cash flows is hard but unavoidable. Relying on the tooth fairy to help make decisions is a triumph of hope over experience.
7/ I was going to tell a joke about value investing as an analytical style, but so many people mistakenly believe it involves statistical factors like book value, there& #39;s no margin of safety.
8/ I was going to tell a joke about pro forma accounting, but I would have to exclude items.
