Investing in companies is outdated

March 4, 2024
by Noriyuki Morimoto

Investing in the stock or bonds of a company is not to buy securities in the form of stocks or bonds, but rather investing in the business operated by the company. Similarly, financing a company is an investment in the business it operates. And to invest in a business is to participate in the cash flow it generates.

Strictly speaking, however, since it also costs money to generate cash flow, the difference between cash inflow and outflow, i.e., net cash flow, is the objective of the investment.

The essence of investment, to generalize, comes down to investing in this net business cash flow. And traditionally, investment has been the delegation of business cash flow generation to business management via the enterprise, rather than directly investing in business cash flows. Therefore, the mainstream of investment has long been in stocks and bonds issued by corporations.

However, if the structure of the business is simple, there is no need for a large-scale management structure like that of a corporation, so investment in business cash flow is done either directly or through a co-investment vehicle known as a fund.

For example, investing in real estate means investing in cash flow in the form of rental income, and investing in power generation facilities means investing in cash flow in the form of electricity sales proceeds. The main methods used here are either direct investment or investment through funds.

In short, whether a corporation, fund, or other entity, it is merely a container for storing business and distributing the cash flow generated therefrom to investors. The container should be designed to be most appropriate based on the nature of the business and from the perspective of the investor’s interests.

The idea that an investment is an investment in a company is now outdated.

 

[Category /Investment Professional]