Exemplary Assumptions for Business and Stock Investment Strategy

This post is in continuation of the one published yesterday.

1. International politics: OPEC, U.S.-led wars in Iraq and Afghanistan, U.S.relations with North Korea, Iran, and Venezuela, and the transition of governance in Russia, are examples of geo-political developments that affect world stocks. A business strategy should be made on explicit assumptions about the balance of power in the world. Such a strategy needs a review when one country affects the state of equilibirum.

2. National governance: Communists in India, shifts between Democrats and Republicans in the United States, and results of elections in Brazil are examples of domestic politics that can affect stocks in exchanges everywhere. The U.S. has never built a nuclear power plant in the last three decades: India is the last hope for this American industry. The fading of a Washington-friendly government in New Delhi is an internal matter of India, but its effects shake the NYSE.

3. Real inflation: administered prices and subsidies hide the truth. Cost drivers for a particular industry may not even figure in the basket of products and services used to compute official figures. A successful business person or stock investor must have his or her pulse on the elements of cost that affect individual companies. Whimsical and panic trade barriers on exports of farm produce and basic materials are examples of changes in price trends that the business management and stock investment worlds should state as assumptions and monitor.

4. Relevant GDP: boasts by governments about annual growth can be misleading if the previous year witnessed a depression. Agricultural production is a common case in point. Sectors and industries are routine exceptions to the overall economic growth numbers. There may be regional differences as well in large countries. The relevant market size matters more for business and stocks than macro figures. Changes in inter-sectoral growth relationships often drive the best management and investment decisions.

5. Regulation and the competition: business has decisive though subtle powers over regulators in most cases. Industries that depend on the oligopoly of licensing, are affected most by this moat. The telecommunications industry in India is even a duopoly in regions. Power equations change over time, and with that, stocks lose and gain value. Much of business management in such countries is actually about keeping the competition at bay through bureaucrats and their political masters. Business executives and stock investors need inside information about ground realities.

Tomorrow' s post will dwell on five other assumptions that should be explicit before strategy is crafted.

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