Many of the principles investors use to evaluate the attractiveness of a stock can be applied to an employment decision. When considering a job, think of yourself as an investor. But instead of buying a stock or bond with cash, you are contributing labor in exchange for compensation in the form of salary, experience, and possibly commission, bonus, and stock ownership. You could choose to spend your labor asset among numerous companies that might bid for your labor, so just like an investor, your task is one of identifying relative value. You must prioritize opportunities that provide the best mix of cash compensation, ownership, professional development, and options for different employment in the future.

As I approach my 20-year reunion at Harvard Business School, the implications of thinking like an investor can be seen in the professional choices of my classmates. In this chapter, I offer more than 10 investor criteria, but they can be summarized in the following broad categories: selecting a profession that offers a combination of risks and rewards that accords with your life and family circumstances; identifying markets and businesses that are likely to grow; identifying employers with attractive business models; and identifying opportunities that enhance the personal brand that will broaden your eventual opportunities. A comparison of several classmates’ choices highlights the impact these criteria can have on the trajectory of a career.

Before attending Harvard, I had been in the Army, and by the time I graduated from business school, I was married with one child and a lot of debt. So my tolerance for more risk was relatively low, and I had a strong interest in finance. This led me to investment banking in New York, which offered both a relatively low risk of layoffs and high cash compensation for junior professionals. Investment banking is a medium-growth field but possesses a solid business model with consistent profitability and cash flow. It also provided valuable branding or personal franchise skills in finance and investing, as well as access to a vast professional network in Manhattan.

My classmate Susan was single with minimal debt and a strong business pedigree. She had been a McKinsey consultant before going to business school. Given her experiences and risk profile, she opted for a job at an Internet company in San Francisco that ultimately led to a leadership position at Google. While Susan’s choice of a relatively untried new company represented some startup risk and lower initial cash compensation, she joined a rapidly growing business with an exceptional business model and access to an unmatched network near Silicon Valley.

John returned to a large retail company where he had worked before going to business school. This choice represented very low risk. Cash compensation was high, and he had worked there before. Growth in the market was relatively low, but the business model was sound and the job offered access to a good but not great business network in New Jersey with access to New York.

Jason was a talented engineer and enjoyed solving real-world problems. He joined a company that made construction equipment. Because of the company’s long history of success and good cash pay, this was a low-risk move. But it came with a relatively slow growing, cyclical market, a mediocre business model, and a location in the Midwest that was less than ideal for professional networking.

As we close in on 20 years, all four of us have been successful. But in general, those who embraced more risk, identified businesses with good growth prospects and sound business models, and exploited robust professional networks have accumulated greater wealth. The key differentiator in the accumulation of wealth was not intellect, work ethic, or talent—it was career selection and how the four of us chose to employ our labor assets.

Evaluating the Opportunities

The following paragraphs explain investor principles applicable to making career decisions. While all these principles should be considered, I have attempted to list them in order of importance.

Establish the risk-return profile. When evaluating an opportunity, the first important factor is determining the likely risks and rewards and the key assumptions implicit in that risk-return profile. Just as an investor can make asset-allocation choices among bonds and stocks, job seekers can choose to allocate their labor to opportunities that offer very different patterns of risk and reward. Understanding those patterns is critical for several reasons. First, as we will see later in Section III, the risk-return profile of your job choice has implications for how you manage your financial matters. Furthermore, a clear understanding of that profile allows you to establish criteria up front for an eventual decision to move on to another job. For example, like someone who purchases a bond and begins to perceive high levels of risk in the issuer’s business, if you chose a job for its stability and come to see that the company’s underperformance is imperiling that stability, you should reconsider your decision. Just as a professional investor develops an investment thesis for a stock (a rationale for why the stock is desirable), you must develop one for your labor choice and force yourself to reexamine the decision and the thesis when circumstances change.

Evaluate the long-term growth potential. For a long-term investor, growth is the largest driver of future value. For an employee, this is even more important. The employee’s time horizon—perhaps a 50-year career—is significantly longer than most financial investors’, so an employee has more opportunity to benefit from the compounding effects of growth over an extended period. In addition to better pay, growth environments usually provide more noncash compensation—professional opportunity, including more chances for advancement and less likelihood of layoffs. This can transform employees’ wealth creation over time. Assume that two friends started with their employers at the same time, each stayed 30 years, each was granted 10,000 stock options at a $10 share price, and each company’s stock was valued at 20 times annual earnings. The only difference between the two friends is that the first worked for an emerging technology company that was able to increase earnings at a 10 percent compound annual growth rate over the 30 years while the second worked for a mature company whose earnings grew only 3 percent per year over the same period. Even if the price-to-earnings ratios stay at 20 times earnings over the 30 years, the value of the first employee’s options is $1,640,000—12 times the friend’s $140,000.

Because long-term growth is difficult to forecast, investors (and employees) should value growth that results from multiple factors more highly than growth from one factor. For example, many technology companies grow rapidly because the market for their products and services soars. But even more attractive, generally, are companies that demonstrate the ability to effectively manage growth not just because their markets expand, but also through multiple channels such as market-share gains, geographic expansion, outsourcing, new product introduction, or successful acquisitions. They are more likely to achieve their long-term objectives even if one source of growth doesn’t materialize.

Check the company’s capital efficiency. Investors look at numerous measures such as return on equity (ROE), return on assets (ROA), return on invested capital (ROIC) or return on tangible invested capital (ROTIC).¹ While these measures produce different ratios, they are all attempting to measure how much cash a company produces in relation to how much capital is employed in the business. Of these metrics, I prefer return on tangible invested capital (ROTIC) because it gives the purest picture of a company’s cash flows from operations relative to the invested capital required to run the business. While there is no hard and fast rule for investors, good businesses usually generate returns on tangible invested capital above 20 percent, which is comfortably in excess of the cost that lenders and equity investors will likely demand for accepting the risk of investing. This number is important to investors and employees alike because it is a good indicator of how successful a company has been in developing barriers to competition to protect its profits as well as how much investment will be required to expand the business. Businesses with high ROTIC generally require little incremental investment to grow. Apart from ROTIC, the business must be evaluated for both the stability of cash flows and the risk that assets will be lost. If the risks are low, investors are willing to accept a lower ROTIC.

This metric is relevant to employees for several reasons. First, it indicates the value added by the company’s services or products. High return on capital suggests a high degree of differentiation from competitors’ offerings and high barriers to entry for new rivals. Low returns imply low differentiation. Businesses with high returns on capital are generally, but not always, “asset light,” meaning they derive their competitive edge from their people, brand, or intellectual property.

Second, because their people are a source of differentiation, high-return businesses are more likely to pay key employees well to preserve their competitive advantage. Consider asset-light businesses such as real estate brokerage, investment brokerage, or management consulting in which a company’s performance is almost solely dependent upon its people. All these professions compensate their high performers very well. In contrast, a capital-intensive steel mill, utility, or manufacturing company will likely see its main competitive advantage in its investments in assets, processes, and equipment, rather than in people. In such a business, you are likely to find senior leaders who are well compensated for managing this large pool of assets, but the broad employee base probably provides services that are commoditized and therefore not highly paid. When a business experiences challenges—and they all do eventually—I would prefer to work for one that must prioritize investments in its people rather than assets. Finally, high-return businesses are generally less likely to suffer financial distress because they more consistently generate cash flow after servicing all obligations and require less new investment to sustain performance over time.

Look for a robust business model. Investors seek business models that are forgiving when unexpected events occur. So should employees. Invariably, a dynamic marketplace will present surprises, and some businesses are inherently more flexible in reacting. Some points to check:

• Predictability of revenue. Long-term market growth rates are the hardest variable for investors to forecast. As a result, investors often prefer businesses that display characteristics that make future revenue more predictable. These include businesses that have recurring revenue (Fidelity mutual funds), businesses that have a significant aftermarket or post-sale component (Caterpillar), businesses widely diversified among customers and geography (FedEx), and businesses that can sustain sales in good and bad economies (Walmart and Coca-Cola, as opposed to purveyors of luxuries like Neiman Marcus).
• Fixed versus variable costs. Businesses with a high proportion of variable costs are more able to mitigate booms and busts in revenue. Advisory businesses such as accounting, consulting, and legal firms are great examples of businesses with significant variable costs. Employee and discretionary costs, including travel, subcontractors, and business development, often represent more than 80 percent of their total costs and can be rapidly and dramatically reduced to meet changing demand. You rarely hear of financial distress related to these types of businesses because they can generally prevent losses through rightsizing. Euphemisms aside, these companies often achieve the desired cost reductions by laying off employees. While this may be a good decision for the business, it is less pleasant for the employees. If you’re a better than average employee, however, your interests are well aligned with the long-term interests of the company and rightsizing will be less likely to target you.

At the other end of the spectrum, a prominent example of a business with extremely high fixed costs is the airline industry. As demand drops, airlines are hard-put to take out capacity. It’s difficult and expensive to eliminate routes and flight schedules; employees are unionized, limiting the ability to reduce the size of the workforce; and the main assets (airplanes) have already been purchased or leased. Revenues drop in hard times as both ticket prices and travel decrease, while expenses remain relatively constant. Given these business model attributes, it’s no coincidence that the airline industry has experienced frequent bankruptcies and poor professional opportunities for employees.

• Safety of the business assets. Assets of a business that are short-term in nature, can quickly be converted to cash, possess little risk of impairment (financiers’ polite term for the loss of much or all of the investment), or are readily salable are generally safer than assets that are long-term, illiquid, or vulnerable to impairment. Staying with our previous business comparison, the primary asset of an advisory firm is accounts receivable (bills to customers), which are by definition readily turned into cash, usually with 30- to 45-day payment terms. The balance sheet produces cash as the business shrinks. By contrast, airplanes, the primary assets of an airline, become difficult to sell when the industry contracts. As the business shrinks, the balance sheet produces little cash to offset losses from operations.
• A local service delivery model and minimal risk of technology disruption. For a potential investor or employee with a long-term perspective, it’s important to evaluate how global trade and technology will affect the business. Over decades, it is certain that low-cost regions like China, India, and Mexico will continue to gain share in industries that are relatively labor intensive or where the labor content adds relatively little value, like manufacturing common consumer goods and textiles. Furthermore, continued technology innovation will decrease the “friction” of distance and international trade, making it easier for low-cost countries to compete with our high-cost labor. Therefore, from an employee perspective, I favor businesses that have a local service delivery model, in which the actual service or product must be provided locally, or have characteristics that require significant real-time interaction or collaboration with customers and partners. These industries and job functions are less likely to be harmed by these trends. Examples of professional choices possessing these characteristics include health care, defense, maintenance services, and education.

Favor a conservative capital structure. For an investor, leverage—debt—can be an attractive way to enhance return across a portfolio in which diversification among many companies mitigates risk. Financial leverage in a specific business can also be attractive for investors and senior managers. Because a significant component of their total compensation is related to stock-price appreciation, they stand to be compensated for the incremental risk created by borrowing. However, a highly leveraged balance sheet generally presents an unappealing risk-reward profile for the mass of employees, who receive most of their compensation through wages rather than equity. In essence, the employees are assuming incremental risk that results from leverage without the potential benefits of leveraged equity returns.

Keep stock option terms in perspective. I have had friends tell me they made a career decision about joining a company in part on the basis of the stock price—“My options are at a great strike price.” This was probably a misguided decision. For an investor, security price or valuation is one of the most important measures of a desirable investment. In a career decision, however, it is one of the least important factors. An active investor’s primary objective is to identify mispricings in the market, exploit the opportunity by investing at a low price, and sell when market participants drive up the stock to a price that accurately reflects the opportunity. Skilled investors evaluate these issues and more to judge whether the stock is correctly priced in relation to its opportunities and risks. But because an employee’s time horizon is long and there are more transaction costs associated with switching jobs than selling a stock, valuation, or buy-in point, becomes less relevant. The longer the time horizon, the less important initial valuation becomes.

A memorable example of this is Google. When Google went public, it was still an unproven firm with an unproven business model but with huge potential. In spite of minimal historical performance, the company was valued above $10 billion at the IPO. An investor who possessed equal risk of gain and loss could reasonably conclude that this was not an attractive opportunity, and many did. However, for an employee, the analysis is different. Google offered some exceptional fundamentals, had lots of cash to ensure it would have the opportunity to execute its business plan for at least several years, and offered significant upside to a potential employee through stock options, which carry no risk of loss, and through increased professional opportunity and responsibility in an exploding market. Google, of course, turned out to be a great investment decision for both employee and investor—in 2015, Google was worth nearly $400 billion. But the differing financial and professional risk profiles were real: The investor faced high risk and high return in a volatile situation, while the employee had high return opportunity—lots of room for gains—and minimal financial risk.

Table 4.1 shows how time can trump changes in price-to-earnings ratios (P/Es). Equity investments with high growth and high valuations can produce volatile outcomes for investors who have a relatively short investment horizon (most active managers hold a security for less than 12 months). But over a longer horizon, like that of an employee, initial valuation becomes less relevant and long-term growth becomes the dominant factor driving value, even if the company’s P/E declines. This example shows how an investor might lose 50 percent of his money if the P/E contracted from 40 to 15 over the course of a single year, but an employee with a 10-year time horizon could more than double his money in spite of the P/E contraction so long as the business continues to grow.

I caution readers not to draw the wrong conclusion from the Google example. Pursuing a job at Google before its IPO was attractive in spite of significant uncertainty about its stock price because stock-price volatility was the only major risk and there were significant other benefits such as the opportunity to get great experience in a well-funded venture while establishing a powerful personal brand through affiliation with Google and its lucrative, growing markets. This is very different from many startups backed by venture capitalists in the dot-com era that offered significant operational risk—risk of proving the business model, risk of securing funding—in addition to stock-price volatility.

Employ the concept of portfolio diversification in your labor decisions. Because you can’t predict the impact of Murphy’s Law (if something can go wrong, it will), a cardinal rule for investors is diversification. This principle has implications for your labor allocation decisions. Don’t underestimate the impact of career choices on your family’s capacity for later job mobility. Specifically consider the following factors:

• Breadth of skills. Broader is better when it comes to job responsibility and the skills you have and will gain. While it may be rewarding and often comfortable to be the expert in a specific area, it can also be limiting: You have implicitly tied your future to the demand for your expertise.
• Size of industry. Bigger is better. Since you will likely change jobs more than several times over the course of a career, having a bigger arena to play in allows for more flexibility and mobility.
• Geography of opportunity. Bigger is better. Choosing to work in a large metropolitan area allows you to minimize the switching cost of a job change in the future because you are more likely to find an attractive opportunity that does not require moving. Willie Sutton was famously quoted as explaining he robbed banks because that’s where the money is. This same principle applies to acquiring wealth the good old-fashioned legal way: If you want to acquire significant wealth, put yourself in an environment that provides significant interaction with those who have significant wealth. This is most easily accomplished by living in select pockets of concentrated wealth—the metro areas of New York, Los Angeles, Chicago, Boston, San Francisco, and Washington, D.C.—or through academic affiliation with schools that graduate the highest-income earners such as those in the Ivy League. This strategy is just common sense and acknowledges that success is rarely accomplished alone, so by putting yourself in an environment among aggressive and smart high earners, you are much more likely to ride the wave of collective prosperity. Some advisers caution that the costs of urban living or elite schooling equalize this equation, but I would argue that they are evaluating the payback over an inappropriately short time. The cost of living in these metro areas is daunting to a young professional, but over the course of your half-century career, it can be a relatively small investment compared to the incremental opportunity.
• Family labor diversification decisions. While certainly not the primary criterion when a couple makes professional choices, the risks associated with family members working in the same business, or even the same industry, should at least be explicitly acknowledged. The income stream of a couple possessing different jobs in totally different industries is likely to be less volatile than the income stream of a couple both working for the same company or in the same industry. Imagine the unfortunate couples who both worked at Arthur Andersen, Enron, Chrysler, or Lehman Brothers over the past two decades to understand the possible negative implications associated with concentrated labor choices. (If you are in this situation, however, these risks can be mitigated through contingency management and management of the family’s capital structure and balance sheet, which is covered in Section IV.)

Similarly, a couple with one partner in a relatively stable career offering good job security and retirement security, but probably not much chance for big jumps in compensation, is well positioned for the other partner to pursue higher-risk, higher-reward opportunities. In an ideal scenario, one partner’s career provides stability and dependable cash flow to cover living expenses while the other’s career offers more risk but also a good chance of significant wealth creation. This is sometimes referred to as the spouse bond/equity labor allocation strategy.

Consider your brand in your career decisions. An important part of labor allocation decisions is the impact a decision will have on your personal franchise or brand. Early in a career, acquiring skills and developing your personal brand are critical. Just as a degree from a top institution demonstrates high academic achievement, professional success at a large, well-regarded organization such as General Electric, Goldman Sachs, or Apple goes a long way toward validating a young professional’s capabilities. Assuming you have experienced success in your early career, the older you get, the less you need this third-party validation. More personal history should produce a unique personal franchise.

Key Conclusions

Most of us incorrectly attribute professional success and wealth creation to hard work and talent. Clearly, success requires these attributes, but wealth creation also requires a work environment conducive to achieving success and wealth. The great business leaders of our time—Bill Gates, Warren Buffett, Larry Ellison—were talented, but they also picked fertile environments to apply their talents. Applying investor principles to your professional decisions can help you identify fertile environments.

The best-informed professional decisions must be evaluated not in isolation, but with consideration of your whole family’s professional choices, risk tolerance, and liquidity. Your financial goal is to maximize family wealth, not just individual wealth.