This is where the money is – the type of money that funds lucrative ventures such as new casino sites. To get the investment assets you need in the shape you want, you need to put up the funds yourself and that is your key decision point. You need to ask yourself what you would do if you were a professional investor. Would you go for a strategy of active ownership or a passive approach? Or would you go for an allocation between active and passive?
There are plenty of statistics in the media and elsewhere on institutional investors’ performance, but for any big investment bank, the focus is on winning key mandates. If that means giving your client enough advice on how to maximise returns, you have done the right thing. Investors will always be judged by investment returns and that is where you will win your clients.
As a practitioner, you have an obligation to spend the time that it takes to look at all the relevant financial data for an individual investment. You will spend far more time on a private company in that way than on a public one. This has a tendency to lead to overvalued private companies and a massive underperformance.
For an individual company to get to a desirable position in its industry, a lot depends on it being of good strategic fit and worth a much larger investment. How big a role does a company’s founders play in its value? How many of the companies have a decent track record? The longer they have been around, the more investors can trust them.
The simplest way to assess a company’s worth is to look at the sum of its parts. Is its tangible net asset value the same as its market valuation? If the valuation is different, you have a company that may be worth more for other reasons.
Furthermore, shareholders have an obligation to fund a company for a reasonable amount of time. If they see that it is being underfunded in any way, then the investors will go elsewhere and the investment will be worth less.
For an investment bank to win business, it has to be able to show how valuable a strategy is for an investment. The basic investment philosophy that I used was that you had to make returns that were sufficient for the level of risk you were taking. If returns were less, then investors could find a better deal with a bank that would manage risks more carefully.
The industry has to show how well it manages the risks. When you are buying an investment bank, you will not necessarily invest if you are happy for it to be a zombie bank. Investors should want to see growth and income and a plan to achieve that. If it is not then investors will go elsewhere.
Of course, financial markets are incredibly fickle and it would be crazy to get ahead of the investment cycle and go for overly-fungible stocks at a time when the market is falling. Investors will remember what you do.
What is your view?
Should retail investors worry about the plight of the big investment banks? And what should they do to fight back? What will happen in the next year or two? Leave a comment below.