What is internal investors !

Internal investor refer to a person who understand company internal investment information and having certain extent of management controllable and influence over day to day operation and long term strategy planning.

Internal investors not necessary a business owner or high net worth personal. Senior management such as CEOs, presidents, directors, general managers, etc... are all internal investors. Internal investors apply methodologies such as value investing and value based management whereas external investors apply fundamental analysis, technical analysis and limited value investment methodology and none on value based management.

Value Based Management, VBM !

The purpose of management is to improve financial performance. Managing for shareholder value is to managing competitive advantage.

Value Based Management is a managerial system that focuses all decisions and actions on the maximization of the value of the company for the shareholders. Emphasis is on increasing future discounted cash flows. This innovative approach is based on close observation of the stock markets. Various analysis performed in the United States and Europe have demonstrated that the market value of companies appears to be highly correlated with the value of the forecasted cash flows and less so with accounting profit (eg. profit per share).

Examples:

Dell and Gateway are in same marketplace and running a very similar businesses model (sell computer directly to their customer) and had very similar profit margin and return on capital until 1996. Dell adopted value-based management since 1996, single weighted revenue growth and double weighted return on invested capital in their compensation. Dell's return on capital rose roughly from 40% to 175% annually and stock price up 12.5x-fold whereas during the same period Gateway return stay in 30% to 50% range and stock up only 3.5x since 1996. By looking purely on financial statement, you would have missed Dell superior financial performance.