How to start value investing as a business analyst

Tips and tricks to transfer your BA skills to investment value

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I remember why I wanted to go into business analytics.

Warren Buffet says that one should not think like a macroeconomist or a stock analyst, but like a business analyst.

And I took this advice to heart.

But, fool of me.

I didn’t realize that the modern definition of business analyst was more to do with translating IT terminology to business stakeholders and vice versa.

Not exactly what Buffett meant by business analyst.

However, learning business analysis laid some good foundations for value investing.

This is what I can share with you.

1. An endless gathering of requirements

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The biggest fear of being a BA, at least for me, is the scope increase: the constant changes in requirements.

I’m particularly afraid of this with reporting requirements, especially when it comes to managers. They’re breathing down my neck and constantly asking for changes to reports: change the color of this bar here, add a new metric there, and so on.

Unfortunately, I found the same thing with value investing. As soon as you find problems with the annual report, you begin to wonder why. And, as soon as that question is answered, he begins to question whether the initial why of his first why was correct.

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For example, I remember looking at this company and just wanted to calculate their return on invested capital, but it seemed inconsistent and jumped down the rabbit hole of return on assets, return on capital employed, working capital, and a million other metrics.

I didn’t really define the requirements for a good investment and ended up calculating financial ratios and digging deeper into the footnotes for information I didn’t really need.

My starting point is to have a good idea of ​​the requirements that make a good investment in your industry before doing a deeper analysis or you will end up like me stuck in one place.

2. The flow of money is like the flow of data

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I remember working on this difficult IT project. It was to see how the data would flow from one system to another, except that the business requirements had many complexities.

At the time, I was also reading annual reports to park money in some investments.

Doing the two mental exercises at the same time gave me this AHA moment.

I was looking at the IT project flowchart and an idea suddenly occurred to me. The flow of data from one system to another reminded me of the flow of cash from one business to another.

This epiphany gave me the idea to not only look at the full financial numbers, but also how to map the flow of data from one business unit to another to better predict whether the company’s capital management was sound or wasteful.

As you can see, the starting point is to imagine how cash flows between a company’s various businesses and use this understanding to better inform your decision making.

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3. Lost in translation

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It has always been difficult for me to convince family and friends that my investment ideas are good.

I was often told that I neglect macroeconomic factors, such as interest rates and predicting stock price fluctuations, while trying to convince them that investing is about the business and not about how interest rates affect stock prices. the actions.

This made me very nervous.

I couldn’t just convince people.

So then I fallen in reason.

This is like trying to communicate with business stakeholders about IT terminology.

People can easily understand the high-level concept of an API, something that communicates between different systems, but trying to explain how the word api it can act as a noun or a verb, and illustrating the inner workings of an API made it lose meaning in translation.

The hardest part of getting buy-in is helping people understand the word outside of the typical dictionary definition.

I only managed to convince a friend to invest in me because I didn’t talk about the company’s performance and competitive advantage, but had to explain how its earnings made it an undervalued company and the stock price seemed cheap.

The key point here is that sometimes to attract investors you just need to make your language so high level that your audience can understand it. Really, there is no need to go into the finer details in an attempt to persuade others.

Conclusions: Do BAs Have a Value Investing Advantage Over Security Analysts?

There is some argument that BAs have an advantage over a security analyst. Understanding how data (or cash in this case) flows from the business unit to the parent organization gives you a much higher level understanding of how the business works.

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However, a stock analyst might have the advantage of using cash flow numbers to better model a company’s value, helping to understand whether the stock price is worth it.

Clearly, it is better to be both.

So, if you’re a technical BA, then it sounds like it’s time to work on your financial skills!