How to invest and why

In my earlier post I tried building an argument through my limited understanding of life-blood of business (finance).  An attempt was made to defend the case of investing in relationships.  Nations invest their might in people for the cause of building sustainable future.  Individuals need to invest in relationship for the want of enjoying the fruits of life, the blessing that humans have over other living creatures.  There are still many facets left that fall under the domain of finance and can be replicated in improving human performance through concerted efforts.  Time value of money believes in a very simple principle – a bird in the hand is worth two in the bush.  It reflects on the risk factor involved while considering future time.  In ontology there is strong relationship between space and time and human mind.  However, it depends on whether one believes in traditional realist school of ontology or in idealist school as to the proximity of human mind with time and space.  It has an interesting take away for human decisions whether they concern finance or any other domain for that matter. 

Working capital is required to maintain flow so that the returns are assured.  Historical cost approach coupled with opportunity cost helps in doing cost-benefit analysis.  And subsequently it impacts decision making.  We started experimenting with valuation approach in order to respond to the market forces.  A traditional approach that we were taught – actual cost or market value whichever is lower, should be taken into consideration while valuing inventory.  The dominance of market forces has made us reach to a level where it is only the market value which dominates irrespective of the actual, historical, or original cost.  It is the valuation built through using influences and branding that has started dominating the decisions of stakeholders.  Valuation is based on perception about future potential and opportunities, capacity to capitalise and audacity to compete.  It is slowly becoming unimportant as to whether you earn profit or not, if you show potential and competence, you would be able to attract all. 

Try understanding the development and determining forces that are impacting the process of decision making.  Behind all valuations lie perception which could be influenced to a very great extent depending on trust, loyalty, communication, intent, commitment, and many other such intangible forces.  The stakeholders are entities that are represented through individuals, through human beings who are vulnerable irrespective of their confidence and stable behaviour.  Firm valuation and valued relationships have strong correlation. 

Machines do not decide, it is the algorithm that helps them decide and the algorithm is function of human mind, hence one needs to prioritise man over machine when it comes to making investment.   Since valuations are the function of perception, it is more important to have transparency in flow of information rather than undue influence because it the flow or control of information that decides the perception.  One small piece of information could impact perception either way, positive or negative.  Though market valuations have become very important in decision making yet the cost seem real.  Frequent fluctuations result in trust deficit, same as in human behaviour.

Firms and brands may be bought and sold on the basis of their valuations, yet the reality lies in responding to the trust of the stakeholders by capitalising on the potential.  If human beings display a sense of integrity through their action, if stakeholders are given the confidence and assurance of transparency and honest intent, firms may not be required to invest in influencing perception.  In the times of leaving everything to market forces and believing in its capacity for correction may not be a suitable solution for assuring well-being of firms and individuals. 

Firms need to enjoy the patronage of stakeholders for now and forever quite different from the way things are today where a firm gets more concerned about its valuation and changes hands and ownership once it starts getting valuation footage.  Firms and brands are getting bought and sold like commodities and it is leading to more concentration of wealth rather than distribution.  It is bringing more inequality in society and firms which are striving for consolidation are investing in their brand building through CSR initiatives.    

The world of business is amazing.  The size and shape of business is judged through its financial viability at times irrespective of the working capital.  The concentration of wealth and then its distribution by choice (if that be) rather than compulsion (mandatory clause on CSR) through sharing responsibility of the state seems two edged sword.  I wish finance and working capital to take backseat and people and psychological capital occupying front seat.  It would certainly assure good value as perceptions would be based on honest intention, growth, and sustainability. 

Spikes are not good both in market and in life.