It is often said that knowledge is power. That could not be more true than in the investment world. One should strive to have as much accurate information as possible before making an investment decision. That said, it’s no surprise that investors want to know what they are getting themselves into. This sentiment is especially true when investors are evaluating potential businesses to invest in. Lack of knowledge, inaccurate or incomplete information leads to uncertainty, which investors fear. The most common culprit of uncertainty? The company’s financial records. There are far too many cases of businesses having inadequate financial records due and scarce reporting, which conveniently serves to mask unpleasant aspects of the underlying business. When one is evaluating a business, murky financial records should be a red flag and, at a minimum, a rationale for further fact gathering.
We all value transparency in our everyday lives; in our relationships, in our business transactions, when buying a meal, or purchasing a new car. Investors should also value the transparency of a company’s financial records. At the same time, when a company is soliciting investors for funding, it should work hard to satisfy what the investors demand. Using the phrase “transparency” to describe different aspects of the business world has become more common. At its core, it simply refers to something being easy to understand, easy to find, accurate, or simply clear.
Without being fully transparent, businesses have the opportunity to hide current debt levels and mask the state of their own investments. Not having access to this level of fundamental information will ultimately drive potential investors away. Often, a company’s path to growth is rooted in its investment strategy, and if investors can’t dissect that, they will likely turn away. The investment process is driven by the balancing of rewards and risks. The greater the uncertainty, the greater the risks. Lack of transparency leads to a lack of knowledge, which means greater uncertainty.
It is worth noting that transparency is going to look different for different companies. While a few companies might purposefully produce fraudulent information, or suppress information to mislead investors, there will be many more companies that simply can’t avoid their financial records being convoluted. Large corporations that encompass many different companies or span different markets are going to produce tougher-to-analyze records than a straightforward business with one narrow business model.
It is inevitable that investors will gravitate towards companies that are able to present the necessary information on their financial records, but they will also tend to prefer ones who do so in a clear, user-friendly way. Just because all of the information is there, doesn’t mean that it is easy to understand. Overwhelming the investor with information, or burying relevant data within mounds of irrelevant figures will likely confuse investors and add to the uncertainty. Again, uncertainty is a motivating factor for investors to look elsewhere.
For the investor – If you are looking for ways to enhance your portfolio by investing in businesses, make sure the companies are providing you with the information that you need to make an informed decision. You are not necessarily looking for the greatest quantity of information. In actuality, you are looking for simply the information you need to make an informed decision and for the information to be presented in a straightforward and easy to understand way. And, for the corporation: – The market will generally gravitate towards those of you who are open and honest about your financial records. Simply stated, investors want transparency. It is essential to remember that more transparency will lead to more trust from investors. This will lead to less uncertainty, and hopefully, more investment dollars as the risk versus reward ratio tilts in your favor.