What are Your Non-Negotiables?
"My non-negotiables are 'kicking efficiency' and 'decision-making'. Both of these are key ingredients to a quality footballer. No point getting your hands on the footy if you're going to give it back to the opposition" - Brad Lloyd, Fremantle Dockers Football Club "Good character is essential. Players come from various backgrounds and we never show prejudices. The main quality you like to see is honesty. Many young men make mistakes that tarnish their reputation prior to the draft. Rather than put a line through their name it is important to understand what happened, the truth, how remorseful the player is and how honest he is about the events. Obviously the ability to play the game is the key criterion". - Adrian Diodoro, Essendon Football Club manager player personnel
Every AFL recruiter has non-negotiables and as an investor, so should you. Non-negotiables are certain characteristics that a company must have, irrespective of their type or the sector they belong to, similar to that of an AFL player. Personally, my non-negotiables for any particularly company (excluding speculative considerations) include competent management (rather hard to measure), company must be making a profit, and subsequently a reasonable return-on-equity (no less than 15%). Judging management can be extremely hard because it is not easily measured. One way of ascertaining whether management is capable is looking at their previous decisions and whether they have skin in the game. What portion of the business do they own? Are their interests aligned with that of shareholders? Did they buy it with their own capital or was the ownsership gifted to them via bonuses or an option plan? Did they make sensible acquisitions or grow the intrinsic value of the business via share buy-backs at the right time or reward shareholders with increased dividends when growth options dried up? The other thing to keep in mind is remuneration, what are they paying themselves? Management can make or break a company. Profitability is important because it significantly improves your capabilities of measuring the intrinsic value of a business. The intrinsic value is your belief of what a company is worth by discounting the future cash flows of that business to the present using a rate of return. If a business is expected to earn $100 a year for the next 10 years, you choose a discount rate (say 6%) and you come up with a present value that you're happy to pay today. You then compare that to the share price to determine whether it is good value. Without a profit figure, the estimation of future profits to discount to the present becomes even more difficult, and in addition, the return-on-equity becomes non-existent. Keeping these simple rules in the forefront of your mind when building your watchlist will get your portfolio into that premiership window a lot quicker.