I had an epiphany the other day. I develop software similar to the way I invest. I decided to examine the similarities to see how my investment strategies work for software development.
Step 1: Selecting an investment
My gut reaction determines if I am interested in an idea. In the newsletters I get from The Motley Fool, I might skip on a recommendation for Best Buy (BBY) but take a good look at Game Stop (GME). Both are retail companies in the technology space. Both are good investments. One stock seemed like a better investment than the other. You should learn to trust your gut because your gut intuition comes from years of experience.
Step 2: Analysis
I do research next to validate my instincts. I am a conservative investor, I’ll admit it (thought not at all in politics!). I like investments where revenues are going up, where cash on the books is higher then debt, and where the price is reasonable given earnings. I am NOT looking to buy at the bottom. Instead, I want to hop on an investment that is comfortably heading in a sound direction. Most importantly, I do research on my investments to see how they measure up to these ideals.
In software, growing revenues is synonymous with a growing market. I am OK with not defining the market itself. For example, Google was not the first search engine company or free email provider yet it is the market leader now.
No debt means good practices in development. Deferred bugs, bad architecture and spaghetti code are all examples of debt that builds up in your product. You will need to pay that debt or sooner or later your product will start to fail and you lose customers.
Reasonable price, to me, is about working in a saturated market. For example, very few companies would consider launching a new desktop word processor or spreadsheet at this time given the dominance of Microsoft. If the market is too mature, the payoff is too far down the road and too hard to get.
Now let me ask you. Would you want to work on a product in a growing market building a well constructed application where the market leadership is still wide open? I would!
Step 3: Buzz
Software buzz increases the chance people will hear about your product and that is key to customer acquisition. I am looking for an investment. My money goes in and 5 years later is worth more than when I started (hopefully 10% compounded annually) . This happens when the value of what I have invested in increases. The more people want something, the more valuable it becomes.
In the end, I discovered that my strategy for success in my investments and my profession are very similar, and for good reason! I guess I shouldn’t have been surprised. Sound principals in investing work for software development and many other aspects of our lives.
