Buy, Hold or Sell? 3 Factors to Help You Make the Right Decision
Image: iStock.com/123ducu
In business, there's an adage that it takes money to make money. That sounds simple enough, but real business is far more nuanced than that. Businesses have three options regarding how to treat their money: buy, hold, or sell.
Isn't there a guidebook of sorts, or an "Investors for Dummies"-type diagram, to know the correct course of every action and reaction? Yes and no. Though there are certainly factors to consider and questions to ask (see below), there is an element of personal judgment involved. Investing is a battle of wits, in which taking the right risks can be rewarded with big gains and playing too cautiously can set you back significantly.
The market can be unforgiving, so your best bet is to fully understand your options and the reverberations of each.
Defining Buy, Hold, and Sell
Buy decisions always require spending money. They are investments in initiatives — hiring new employees, investing in new equipment, developing new products, investing in marketing, and so on — that will help the business generate long-term success.
Holding is a state of neither investing nor divesting but of maintaining. The business's position may improve or deteriorate without any money having been spent. A holding business makes the most of existing opportunities and resources.
In sell mode, a business liquidates inventory, no longer invests in current operations, or otherwise divests. This often happens when a business is closing its doors for good, but there are other situations when a sell is necessary to keep the operation running.
Orchestrating a successful business means understanding when to switch among these three modes. It's the transmission that keeps you between the lines of financial gain and personal cost. Shift deftly, and you'll create a sustainable return on your investment.
The Right Questions to Ask
To determine how buying, selling, or holding will accordingly affect your business's valuation or its worth, it's important to set a framework for the business and apply that trajectory to each subsequent decision. Consider these three major determinants to know which scenario to choose:
1. Does it create value?
Short- and long-term valuations need to be researched and forecasted when debating a decision. Your success will hinge on how well you can understand the value associated with certain investments, like updating software, rebranding the company, or adding employees. Other times, value is created by what you remove. Slashing bloated budgets, cutting unnecessary staff, or removing sluggish product lines have helped countless companies generate value.
Apple is a great example. Twenty years ago, the omnipresent technology company was in danger of going bankrupt. Steve Jobs reversed Apple's fortunes by refocusing the company's efforts on making computing simple for everyday consumers. Apple continues to march to that simplicity drumbeat to this day.
Ultimately, the name of the game is value; if none is created (quickly or in a long forecast), mosey on. Don't sink money and resources into a bottomless pit. If you can't add value, subtract yourself from the equation.
2. Do you properly understand the risks?
Investing requires you to mind the bends — every trend has one. Is it a big bend, a small bend, a clear bend? Can you see around it and understand what will happen down the road? What are the variables that can affect it? Research, research, research!
Holding is often seen as the least risky option, but sustaining a company is difficult when competitors are completing acquisitions or scaling aggressively. A great example is the way Netflix and Redbox put Blockbuster out of business. This was not a unique problem; several retailers also got hit by the wave of e-commerce companies disrupting their holding patterns. Innovation sneaks up on all industries.
3. What is the cost of failure?
How do we get as much control as we can? If we don't do it, what impact does that have? If we do and it doesn't end up being successful, what impact does that have? These are all follow-up questions to ask when debating failure.
Consider the ramifications of a purchase. Buying has the highest risk because it involves an investment, which could include a new employee, an upgraded software platform, product development, a merger or acquisition, or similar expenditures. It's possible that the money spent here could be wasted, as it could add debt without creating any value — and some would definitely consider that a failed effort. Each investor will have to consider his own definition of failure.
This is the framework that every business needs to use. From the smallest things to the largest things, you should constantly think through your decisions with those three prompts — whether that's over the course of a day or a decade. Remember: No one can be perfect. What is critical is assuring that in that day or decade, the biggest decisions are consistently done right.
This article was written by Martin Stein from equities.com and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
