Needs are necessities (stating the obvious, I know – just bear with me). Wants are purely emotional, often driven by greed, vanity or lust. And the moment you really want something in business, you’re going to pay too much for it… guaranteed.
Emotions are incredibly powerful. And in business they can be incredibly destructive. For this blog, I’m going to write about the emotion of wanting and the dangers it brings for entrepreneurs.
Your business NEEDS electricity, constant innovation, revenue, brain power, and property. As a business owner you might WANT a beautiful storefront with fancy lunch rooms, record profits year after year, and so forth; but they’re not necessary for success. And if you let your emotion of wanting them right now take over, you’re bound to pay too much to get these things.
Continually thinking about your wants, as opposed to your needs, is a recipe for failure. Surprisingly, we see WANTS take precedence over NEEDS at the highest of levels in business these days.
Case in point: Many of the publicly traded Fortune 500 companies.
Two questions before I start:
Do you think borrowing money to buy stocks increases risk?
Do you think borrowing money to buy stocks near all-time highs increases risk even further?
According to Paradarch Advisors, nearly 87% of the $3.4 trillion in debt taken on by non financial corporations since 2009 has been used by companies to pay dividends or buyback stock.
Boards of directors for many of the world’s largest and most successful publicly traded companies WANT higher share prices every quarter. From 2009-2012, their WANTS were met simply from the economic recovery. Companies had bounced back sharply after the recession, and corporations like Apple were innovating with incredibly transformative products such as the iPad (which deservedly improved its profits). But in 2013 and 2014, as the stock market rally began to get frothy, and the economy slowed due to a lack of innovation, it became harder for large corporations to keep their shareholders happy. And in many instances, starting near Q4 of 2012, stocks began to correct downward. Just look at Apple’s 5 year chart for a perfect example:
Despite the slowing economy, and the clear NEED for companies to spend on innovation, directors WANTED stock prices to reestablish their upward trajectory immediately, along with dividends, otherwise heads would roll. In short, activist investors on the board of directors WANTED to keep the good times rolling and continue to fatten their wallets – and they were willing to ignore the company’s long term success to do so.
What many of these Fortune 500 companies NEEDED in 2013/2014 was innovation. They needed to spend money on internal projects to produce game-changing products. This strategy establishes long-term sustainability. Instead, many corporations decided to borrow record amounts of money to pay out stock dividends or buyback their own shares to improve their EPS (earnings per share) for the next quarter.
Apple’s board, for example, has authorized roughly $130 billion, via borrowing, and using some of the company’s treasury, to buy back its own shares and pay dividends…
sources:
https://www.apple.com/ca/pr/library/2014/04/23Apple-Expands-Capital-Return-Program-to-Over-130-Billion.html
http://www.economist.com/news/business/21616968-companies-have-been-gobbling-up-their-own-shares-exceptional-rate-there-are-good-reasons
In my view, this was likely done to keep the stock price on an upward trajectory. But the cost of fulfilling that WANT could be tragic. All that money spent on buying back shares will come at a tremendous cost. The money would be better spent opening up (or expanding) a secondary R&D division, which could lead to entirely new industries (just as the iPad did).
Companies such as Apple are wagering significant amounts of their savings and borrowing capacity because they WANT higher share prices today. Seems like a hell of an unnecessary risk, doesn’t it?
Think about it. What does Apple NEED right now to keep growing as a company? New products and more innovation.
What do Apple shareholders WANT right now? A higher stock price, and bigger dividends.
To potentially sacrifice a NEED for a WANT is dangerous in business.
Now, it wouldn’t be fair for me to say Apple is no longer innovating simply because they are spending billions on stock buybacks and dividends; but I think we can all agree, they haven’t produced a new company-making product since the iPad (5 years ago). In light of that, it would be wise for the company to bet big on product development, not its stock. And I’m sorry, but the Apple Watch just won’t cut it.
Another reason Apple NEEDS innovation and a new product line: Jordan Golson of Tech Republic reported this week that, “During the quarter (January through March), Apple sold 12.6 million iPads, the lowest total for the March quarter since 2012, and a drop of more than 3.7 million units year-over-year. In fact, iPad sales dropped to the lowest second quarter revenue since 2011 at $5.4 billion.”
source: http://news.yahoo.com/tim-cook-reaffirms-belief-ipads-112712764.html;_ylt=A0LEV7kqcEJV_jEAp6YnnIlQ
As an entrepreneur, you must separate your WANTS from your NEEDS. The moment your wants take precedence, you’re putting the long-term sustainability of your business in question.
Stay hungry,
Aaron
