Tag Archives: risk

Harsh Economics: Invest in Growth at a Reasonable Price (GARP)

This post of mine was published recently on American Express’s OPEN Forum.  I’ve reproduced it here for my readers.

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Tough Times

Harsh times provide opportunities. Our current economic distress has dislodged entire industries. The legal profession in is the midst of a soul-search that will end up with a lot fewer partners and associates to support them. Investment banking is a shell of its former self. My field, financial advisory, is seeing a sea-change in both how the industry is structured and how services are delivered. New firms are being built on the ashes of former historically relevant businesses.

In any period like this, many people will find themselves pushed out the door or sitting on their hands waiting for things to recover. Other businesses will realize that opportunities are to be had while everyone is scrambling for cover.

Taking Risks are Risky, Right?

Those more aggressive businesses must be able to quanitify the risk inherent in pushing ahead in treacherous times. Those investing in their businesses must content with the following hampering — nagging — questions:

  • What if the markets don’t bounce back?
  • What happens if I go after growth only to realize there isn’t any?
  • What if my business has evolved away from those spots I’m investing in?
  • What if more economic shoes drop and things grind to a near-standstill?
  • What is my backstop?

I’d like to provide a framework for quantifying the risk in expanding during times of crisis and apply some homespun rules to help guide small businesses through these times.

Fidelity Investment’s Peter Lynch: GARP Guru
Peter Lynch was a men amongst boys in his career as a mutual fund manager. Handily beating most benchmarks for years, Lynch devised a strategy of investing in GARP, or Growth At a Reasonable Price.

From Investopedia.com

Lynch attributed his success to being able to invest in winning, growing businesses at fair prices. He didn’t mind paying up for a winning business, but he did mind overpaying for a winning business.

What was Lynch’s success?

GARP, or Growth At a Reasonable Price, allowed Lynch to swing for the fences but made sure to cast a skeptical eye on outlandish growth. Lynch would pass on potential investments if growth prospects were too high. For Lynch, taking on risk was OK but companies growing by leaps and bounds were just too risky for his portfolio.

How to Lower Risk When Shooting for the Stars

For Lynch, much of his analysis boiled down to using a metric called the PEG ratio. This metric throws past earnings, current prices, and expectations for future growth into a blender and spits out a number that shows whether or not a company is currently undervalued or overvalued. Most insightfully, it compares how a company’s current valuation stacks up against the market’s expectations for its growth. According to Lynch’s methodology, the lower the PEG ratio, the more cheaply investors can invest in future growth.

So What Does GARP Have to Do with Small Business?

Lynch believed the major step to achievement is investing in growth. In taking chances. In swinging for fences. But he also believed that investors needed to hedge their bets. Go for middle of the pack growth. In Lynch’s terms, invest in those projects that offer pretty sure return on investment and don’t carry the risk of firehose growth.

In other words, incrementalize your growth by launching smaller projects requiring minimal investments.

8 Examples of How Small Businesses Can Find GARP

  1. Hire or tap a team member to start a blog. Blogging is not about merely having a foothold in the blogosphere. It’s about carving out a space for you to show the world that you and your team/business are experts in whatever you do.
  2. Create a low budget, high impact social media strategy. It costs nothing and both surgically targets your market participants and along with your blog, can further brand you an expert in your vertical. Twitter and Facebook are like a powerful marketing drug.
  3. Explore ancillary revenue sources: Ghostwriting, keynote speaking, outsourced projects. Vertical integration, consulting, advisory work. Your position in the industry opens you up to many different potential, revenue-producing activities. Getting involved with new revenue-producing projects may enable you to stumble on the future growth vehicle for your business.
  4. Focus on referrals: Financial advisory work thrives on the word-of-mouth, old-school referral. “You should meet with X; he’s a really sharp guy…” Think of referrals as a marketing channel within your business and get serious about strategizing how to get more. Target happy customers and overlapping business partners.
  5. Write a book: It just takes time and you probably have an entire tome of material floating around in your head. The content of the book should represent that you’re an expert and focus on a theme that you think target clients/customers would like to read about. Find a publisher or just self-publish on Lulu.com.
  6. Start a radio program: Little cost, high impact. Find new prospects and let existing customers know about your content. Use BlogTalkRadio to broadcast and promote yourself and your program.
  7. Partner for profits: Reach out to a valued partner and develop a new product or service lacking in your industry. You’ll find new revenue opportunities, create a new source of sales prospects, and grease the referral channel.
  8. Educate others and yourself along the way: Education sells. Bad job markets provide an opportunity for adults to retrain and invest in themselves and get new skills. Can you expand your business by teaching others? Chinese medicine practitioners who teach Chinese medicine in local schools will find that students are also potential clients.

Upheaval is unsettling. Many of us will fret ourselves into lethargy. Others will take the opportunities given by the market to invest in growth. Some will whiff big while the smart, well-thought-out business leaders of today and the future will make hedged bets during this period of uncertainty to grow their way to future profits.

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