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Bill ackman's easy eight-step investing checklist hey guys today we're going to talk about Bill ackman's easy eight-step investing checklist let's get right into it number one the business must be straightforward unpredictable businesses frequently become more complex as they grow over time these complexities can divert attention away from a company's primary Mission and core activities businesses that Master Simplicity can stay focused on their defined goals while eliminating processes that distract ad clutter and add no value Simplicity can sometimes be viewed negatively as if a business model and its processes are too simple it cannot grow in fact it is frequently the polar opposite a business that is easier to run is more appealing and can scale more quickly after all there is less to manage number two the company must generate free cash flow free cash flow is an important metric because it demonstrates how effective a company is at generating cash investors use free cash flow to determine whether a company has enough cash to pay dividends or buy back shares for furthermore the greater company's free cash flow the better positioned it is to pay down debt and pursue opportunities that can improve its business making it an appealing choice for investors free cash flow is one of many Financial metrics used by investors to assess a company's Health return on investment the quick ratio the debt to equity ratio and earnings per share are some other metrics that investors can use number three it must hold a commanding Market position a company with a dominant Market position can operate independently of its competitors and customers a dominant position allows a company to charge prices above the competitive level for products of lower quality effectively limiting competition because of its dominant Market position a dominant undertaking may be able to act in ways that limit actual or potential competitors opportunities for growth and Market entry such Behavior may be considered abusive and can take many forms because the term abuse is objective by definition no proof of the undertaking subjective intent to harm competition is required proof of such intent May however confirm the existence of abuse number therefore competitors must face significant barriers to entry barriers to entry are Economic and Business terms that describe factors that can prevent or hinder newcomers from entering a market or industry sector thereby limiting competition High startup costs regulatory hurdles or other barriers that prevent new competitors from easily entering a business sector are examples of these existing firms benefit from entry barriers because they protect their market share and ability to generate revenues and profits common entry barriers include special tax breaks for existing businesses patent protection a strong brand identity customer loyalty and high switching costs other barriers include requirement for new businesses to obtain licenses or regulatory clearance before they can begin operations number five a high rate of return on capital is required return on invested capital or roic is a calculation that is used to evaluate a company's efficiency in allocating Capital to profitable Investments divide net operating profit after tax by invested Capital to get the roic formula roic measures how effectively a company uses its capital to generate profits when a company's roic is compared to its weighted average cost of capital it becomes clear whether invested capital is being used effectively return on invested Capital measures how effectively a company directs its capital toward profitable Investments or projects the roic ratio measures how effectively a company uses the money it has raised externally to generate returns when a company's return on invested capital is compared to its weighted average cost of capital it becomes clear whether invested capital is being used effectively number six the company must limit its exposure to extrinsic risks that it cannot control risk management has always been an important tool in running any business especially during a market downturn an unexpected surprise can destroy your business in one Fell Swoop in any economic environment if you don't have the right risk management strategies in place to prevent or at least mitigate the damage from that risk prioritizing risks and threats should always be the first step in developing a risk management plan of course a risk in the top category should take precedence over the others and a plan to rent or at the very least mitigate these risks should be implemented there is however a catch if a risk falls into a lower rung but has the potential for more financial harm it should be prioritized number seven the business must have a strong balance sheet and not need access to outside Capital to survive businesses with strong balance sheets are more likely to survive economic downturns and Thrive when things improve most strong balance sheets will have intelligent working capital positive cash flow a balanced capital structure and income generating assets number eight the company must have a strong management team as well as good governance good corporate governance ensures that a company's board of directors meets on a regular basis maintains control over the company and has clearly defined responsibilities it also guarantees a strong risk management system corporate governance is one of the pillars of any successful businesses through processes practices and policies corporate governance promote sound and effective decision making furthermore it serves as the first line of defense against any allegations or malpractice or breach of corporate Duty it can include a wide range of tasks and governance system systems differ from one company to the next to take one high level description the Oxford University press business English dictionary defines corporate governance as the way in which directors and managers control a company and make decisions especially decisions that have an important effect on the shareholders
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