Between semesters at college I held a summer job as a busser at a local restaurant on the lake. Unlike my peers who were living it up during the summer months, I usually worked 2 or 3 jobs to pay for school, my car, and other essential items.

*cough” Beer.

Every couple of weeks or so this gentleman would dock his yacht outside the restaurant and walk in with his wife and young kids. I was perplexed by this situation. It seemed like the guy never actually worked. Come to find out – he didn’t. At least not in a conventional sense.

One day I mustered up the courage to inquire about his background by asking a few regulars at the bar, “What is that guy’s story?”

They responded in kind. “He day trades.  Supposedly he made $10 million by the time he was 40 and decided to retire early. From then on he has been traveling the world on his boat with his family”

“Wow! How I’d love to be that guy.” I thought.

That fall I returned to school to continue my pursuit of a degree in Mechanical Engineering. I struggled. My heart was no longer in it. Engineering wasn’t my thing. In the back of my mind the whole time was this notion of “retiring early”. I was certain that engineering wasn’t going to offer me that possibility – unless I became an inventor. It sounds appealing but…no thanks.

It was after that summer, year 2.5 at Michigan State, that I decided to pull the trigger and pivot from Mechanical Engineering to Finance. It wasn’t going to be easy. I literally had to start over. And I did.

Other than some introductory Finance courses, conversations with my dental hygienist (a surprisingly informed investor), brief interactions with my financial advisor, and the story from the guys at my summer job – I really didn’t know anything about Finance.

I generally thought “how hard could it be?”.

After all, I literally just finished taking courses on Differential Equations, Multivariable Calculus, Engineering Physics (with this guy), and Chemistry – the math will not cause me any reason to worry. I figured Finance offered me my best chances at early retirement. I went all in.

Before I officially became a Finance major, my girlfriend at the time, who was already in the business school heeded me warning. She would reassure me, “Business is very competitive. You need to get involved with student organizations. And you need to try to be a leader in them as well.”

I joined all of them. At least the relevant ones. And I tried to lead them all. All attempts failed.

Being the late entrant into an election process that has been ongoing for several years doesn’t typically go well. Despite it being an “election” for the most part there was a well-established succession plan. I got it. At least I tried.

It was this pursuit that again altered my entire thinking, perspective, and understanding of Finance.

The group was called Student Investment Association. It was composed of a series of member-groups who were responsible for evaluating publicly traded companies each semester and pitching a buy, hold, or sell recommendation to the organizations leadership (aka investment committee). The organization had real money to invest and I certainly had a lot to prove so I pitched an idea every semester – from the day I joined until graduation.

Before I could pitch anything useful, I first had to figure out what the hell I was doing. The leadership team offered a brief introduction to financial modeling and analysis to get me started. Typically, they looked for the teams to develop an investment hypothesis by leveraging a Discount Cash Flow (DCF) or income approach to evaluating each opportunity. I became a sponge. And a learning machine.

The notion that the market may not accurately reflect the price (cost) of an investment completely blew my mind. It has been something that intellectually challenges me every day and has become the catalyst for me dumping my initial philosophy of “getting rich quick”.

After I graduated, I joined a boutique consulting firm, and since have been working on applying many of these principles to the work that I do. Aside from a brief stopping off point in valuation services, I have mostly been supporting clients by helping them strategize, plan, and execute large enterprise impacting transformations – particularly those that include technology. Interestingly, it is this notion of value that time and time again I constantly visit and revisit. Ultimately, I have adapted many of the concepts of value investing into what I refer to as the “value mindset”. Or more simply put, a value based framework for making strategic choices. Below are the foundational questions which are at the core of the framework.

  1. Is the company making choices that increase the firm’s ability to generate returns above their cost of capital? What is required to ensure this excess can be maintained over time? Does this choice accrete or deplete value?
  2. Is the company efficiently deploying capital? Is the best place to invest capital in the business? Buy back shares? Release a dividend? Is this choice a good use of limited resources? Will this choice free up capital to reinvest in area with higher returns?
  3. Is the company taking advantage of disequilibrium of price and value to benefit shareholders? Making accretive acquisitions and divestitures? Buying distressed or discounted assets? Balancing perception and reality? Is there an inherent upside that may create more benefits than initially anticipated?

I think recently I have reached a moment of clarity. Everything seems to make sense. The irony of it all is that the path to getting there was a little messy. From a student and young professional perspective – the process was a constant struggle. But here we are with a formed idea. A decade later.

In the next entry, I will explore the value mindset framework which helps clarify the above questions.  Additionally, I will explore various scenarios and examples where the framework can be applied in different scenarios to understand how “all” decisions can be measured by the extent that they “add value”.

Something to Consider. Value is in the eye of the beholder. The intent of the framework is to ground the dialogue on what should be considered value in the context of the enterprise (economic value) and how decisions / choices should be evaluated on their own absolute value contribution. Standalone professions exist which are dedicated to appraisals and valuation. I don’t claim to be one of those people. Nor do I pretend to be. If your problem or opportunity is specific I recommend reaching out to someone with expertise in your area of need, particularly if the decision exceeds your core competence and knowledge base. If you need assistance with that feel free to shoot me a note. Otherwise, enjoy!

2 thoughts

  1. Good read Joe. Waiting for your next article to understand how we can apply the approach across different problems.

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