STOP Grinding (Secrets of Stock Valuation)
In this video, we are going to talk about why YOU should stop grinding. Watch now!
New daily live streams 8:30pm MST on my other YouTube channel here: https://www.youtube.com/channel/UCyA6hunVgBiE3QEDn9GpQtw
VIDEO SUMMARY
Introduction
Last week I made a video about how it is important not to be lazy. The basic idea was to work hard. This week I want to add some nuance to that idea, because it is not enough to just work hard. You also want to work smart. You want to work hard on all the right things.
The idea I want to focus on here is to stop grinding. A number of business books say, “If you want to be successful, go out and start grinding. If you work hard, you can grind your way to success.” That approach to business has never sat well with me. My philosophy is different. If you are describing your work day as “grinding through the day,” that is a sign that you are doing something wrong. Grinding sounds horrible. It is much better to find a job where you enjoy coming into work every day. You should be excited and fulfilled at work, not grinding.
Example
Let me give you an example. Imagine you hate doing the taxes for your business. You hate tax season. And every year you sit there and fill out those forms, and you grind it out. But you have another option here. Instead of grinding it out, you could outsource that activity. I am an accountant, and I have a ton of friends that love doing taxes. It is not grinding to them. So you are better off outsourcing your taxes to someone who is better at it than you. Then you can focus your time on activities that are creating more value.
The point is that grinding is generally a sign that you do not like what you are doing, and that there is probably a better use of your time. Time is valuable. You want to be spending your time on activities that lead to success. These are usually things you are passionate about, that you are good at, and that are making you money.
A Word of Caution
Let me explain what you are trying to avoid here. Let us say you build a business by grinding it out. You spend all these years grinding and you finally succeed in building a business that is successful. What happens next? In order to keep the business running, you are stuck grinding it out. You have to keep grinding for the next ten years. What you should have done was to build a business that did not feel like grinding in the first place.
This is not an easy thing to do. I am saying you not only have to work hard, you have to prioritize the activities you are working on. You are going to have to look at your business and decide what things you will do, what gets outsourced, and what you will say no to.
Theoretical Finance Can Help
It is actually helpful here to know a little about theoretical finance. If you can understand how an investment bank values a company’s stock that informs you on what type of activities you can focus on to add value.
I am going to run through the basics of stock valuation. The price of anything is the present value of all future cash flows. If you want to know how much a company is worth, you look into the future and determine how much money you expect that company to make every year. You can then determine a value for risk, and discount those cash flows to what they are worth today.
Example
In this example, a company produces one hundred dollars each period for five periods. You assess the riskiness of those cash flows at 15%. So you would be willing to spend $335.22 to purchase 100% of the stock of that company. I realize this is very oversimplified. What investment banks do is much more complicated than this, and I am not using accrual accounting. My hope is that you understand the fundamental concept that the value of something is based on your operating activity.
What are those cash flows? It is what is generated from operations, or revenue minus cost. Those free cash flows are your profit.
What is profit? Profit stands for your competitive advantage in the market. If you are looking at two similar competitors, and one is generating a higher profit, they can either charge higher prices or have lower costs. They are creating more value in the market place.
Building Competitive Advantage
So what does all this have to do with grinding? Imagine you have two companies. In one company, all the employees are grinding their way through the day. The other company has employees that are working hard at jobs they love. Which of these company’s do you think has a competitive advantage? You guessed it. It is probably not the company that is grinding.
The benefit of stock analysis is it helps you to identify the activities in your company that contribute to your competitive advantage. The more you can focus on those activities, the higher your stock price, and the more valuable your company will be.
How This Benefits You
I realize that sometimes in business, you have to do things you do not enjoy. And sometimes you do describe your work as “grinding.” But it should not be a big part of your day. If you find that you are spending more and more time grinding, I would encourage you to take a step back. See if you can prioritize the activities of your day to spend more time on things you feel are really creating value. What got you excited about starting the business in the first place?
It is important to understand your stock price and company valuation. It helps you to focus on the priority activities. When the investment bank comes around to buy your company, they are not going to care about your grinding activities. They can probably find someone cheaper and better to do those things than you. What they care about are the activities that are creating a competitive advantage. When you focus on those activities, that is working smart.
Leave a comment down below letting me know what you think!
If you find these videos helpful, please subscribe to my YouTube channel.
Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.