Correct Mindset of Stock Investment
If you ask around the meaning of buying stocks, most of the people will tell you that it is about buying stock at a cheap price and sell when the price gone up. And don’t be surprised that such answer may also come out from those so-called “financial consultants”.
Now, please, the answer is not wrong, but indicates that these people are treating stock investments like “buying a piece of paper (or record since we are scripless now) and sell it when the price of that paper went up”. If you use this approach or having such mindset, you are not a value investor and you are largely affected by market sentiment. You are just another player.
This is certainly not the Warren Buffett or Peter Lynch’s way. So what is the Warren Buffett or Peter Lynch’s approach? When you buy a company’s shares, you are effectively investing in that company’s business. And you should behave likewise. It is not uncommon to find share price of a company moves (appreciates/depreciates in paper value) in opposite direction against its business. If you focus on the paper, you may cut loss. But if you focus on the business, assuming good fundamental, you will pump in more funds. If you really follow market sentiment and dump a company's share even when it has wonderful business, I felt sorry for you.
So how does a person behave if he/she is considering a partnership business? Let’s say someone invites you to invest in his business. Perhaps the business needs more fund to expand. I am very sure you will do at least all of the followings (list not exhaustive):
- Visit the company, talk to the employees.
- Observe the crowd and look at company’s customers’ record to identify repeated customers.
- Ascertain the company’s SWOP (strength, weakness, opportunity and threat). E.g. customers’ loyalty, strategic location, brand name, market share, cost structure, market competition etc.
- Obtain a copy of business profile.
- Review the company's P&L for last few years. Of course, if the report is not audited, then you have to take with a pinch of salt.
If you ask around the meaning of buying stocks, most of the people will tell you that it is about buying stock at a cheap price and sell when the price gone up. And don’t be surprised that such answer may also come out from those so-called “financial consultants”.
Now, please, the answer is not wrong, but indicates that these people are treating stock investments like “buying a piece of paper (or record since we are scripless now) and sell it when the price of that paper went up”. If you use this approach or having such mindset, you are not a value investor and you are largely affected by market sentiment. You are just another player.
This is certainly not the Warren Buffett or Peter Lynch’s way. So what is the Warren Buffett or Peter Lynch’s approach? When you buy a company’s shares, you are effectively investing in that company’s business. And you should behave likewise. It is not uncommon to find share price of a company moves (appreciates/depreciates in paper value) in opposite direction against its business. If you focus on the paper, you may cut loss. But if you focus on the business, assuming good fundamental, you will pump in more funds. If you really follow market sentiment and dump a company's share even when it has wonderful business, I felt sorry for you.
So how does a person behave if he/she is considering a partnership business? Let’s say someone invites you to invest in his business. Perhaps the business needs more fund to expand. I am very sure you will do at least all of the followings (list not exhaustive):
- Visit the company, talk to the employees.
- Observe the crowd and look at company’s customers’ record to identify repeated customers.
- Ascertain the company’s SWOP (strength, weakness, opportunity and threat). E.g. customers’ loyalty, strategic location, brand name, market share, cost structure, market competition etc.
- Obtain a copy of business profile.
- Review the company's P&L for last few years. Of course, if the report is not audited, then you have to take with a pinch of salt.
- Have a discussion with the founder. Get him to reveal SWOP and ascertain his integrity. If you found out that he is trying to avoid or covering up something, you should pack up.
I am never a businessman, but I would do at least all of the above. It's really common sense, although my lecturer used to say that "common sense is the least common human attribute". Anyway, if you just want to “trade the paper”, then this article will be irrelevant to you. Now, Warren Buffett and Peter Lynch are real expert when it comes to evaluating a company’s business and its management team. Even though we may just buy only 0.01% of the company’s shares, it should not stop us from using their approach. If time is what you don’t have, then I have a suggestion - pay me and I’ll do it for you.
A True Testimony – Creative Technology
If I remember correctly, a few years ago, an article appeared in the Fundsupermart.com about a Singapore taxi-driver whose investment turned him into a millionaire. If I can find that article again, I will put it on my blog. What happened was one day, this taxi-driver pick up Mr Sim (COE, Creative Technology). Singaporeans should know this man, a poly-grad who turned a company into one with large global market share and dual listing in Nasdaq (likely to be delisted from Nasdaq this month) and SGX. Both of them had a wonderful conversation during the rides and this tax-driver was deeply impressed with his humble customer. One thing for sure, the tax-driver is not an investment analyst, and most probably not a CFA charterholder. But he based on one simply principle that have been highlighted by Warren Buffett over and over again – you invest in a company that is run by a CEO of a such character that you want to marry your daughter to him. The taxi-driver and Mr. Sim's chit-chat session was not long, and the investment decision may look hasty, but that’s not my point.
For those who have been active in local stock market for last 10 years should know that Creative Technology’s share went up from about US$5 a share to nearly US$70 a share in late 90s. That taxi-driver must have invested more than S$100,000 in Creative Technology based on one man’s character. One more highlight, Creative Technology's share price has dropped to near all time low right now due to continuous disappointed earnings. But again, that's not my point.
How To Evaluate A Business?
Firstly, we must accept that our evaluation will be much simpler as compared to Warren Buffett or fund managers. If you tried to do exactly what they are doing, I am afraid that is not going to be possible. You don’t believe? Ok, try to make an appointment with a listed company’s investment relation manager and tell him that you intended to buy 10 lots but you like to interview him first. There are a few reasons why we (retail investors) just can’t be as complete or receive as much information as we want compare to fund managers. For example:
- Warren Buffett buys a controlling stake in a company. Fund managers may not buy controlling stake but the size would be large. Retailers? Ten lots, may be twenty or more. Therefore, you will receive different treatment from the company’s management.
- Information that a company is willing to reveal is likely to be different between meeting Warren Buffett, a fund manager or investing public.
- You can be sure that warren Buffett and fund managers have sophisticated systems/sources to assist them in their evaluation. Retailers? We can’t even afford wirenews at home.
The good news is that there are other things we can do to compensate our shortcomings:
1) Be vigilant
Keep an open eye when you go shopping. Don’t just get entertained, you may make big bucks just by being observance. Let me share a living example. A few years ago, Jurong Point (JP) was not as big as it is today. When JP officially opened for business, I thought the shopping mall will not be impressive. This is because its customers will make up of mainly factory workers, and may probably damage its image. Subsequently, I witnessed how JP grew and expanded its floor area by enlarging the shopping mall. Today, even with its expanded underground carpark, finding a parking lot requires huge amount of luck. Besides the parking lot, finding a seat at the food court “Kopitiam” also requires luck and patience most of the time. There was never an empty space/shop inside JP. Without talking to the management, what I seen with my own eyes is more than enough for me (and my friends) to call a buy on JP (jointly owned by Lee Kim Tah and Guthrie). And true enough, both Lee Kim Tah and Guthrie reported continued rental growth from JP. We made some profit out of it.
2) Take note of aunties’ and uncles’ gossips.
How many times have you heard friends and colleagues commenting or cursing a product or a company vigorously? So what do you do with it? You join in the fun and then you forget about it? Well I don’t. If a few persons said it, it may not be true. But what if you heard again and again from different mix or locations? Then there could be some truth in it. When Breadtalk was listed in 2003, its share price surged more than 50%. Their business concept was quite innovative and fashionable, and many people like it. And I heard the following gossips frequently:
“wah, Breadtalk employ many young girls….”
“eh, that spicy bah hoo (flosss) bread is really nice…..”
I patronized a few of their outlets. I found that the above two statements were true. The bread is nice to eat, but every outlet is heavily staffed. Labour costs would be big problem in a competitive market where you can find many other popular confectioneries such as Bangawan Solo, Four Leaves, Prima Deli etc. In addition, most outlets are located at pime areas, so rental expense will be scary. And after we monitored and study their progress, we decided that Breadtalk should be avoided. Why were we interested in Breadtalk then? Answer - their franchise business. A franchise business model is a wonderful model which had created empires such as MacDonald and 7-11. I knew this long ago but Breadtalk’s progress was not exciting at all. Thus I was unable to differentiate Breadtalk’s business as compared to the rest. There was no reason at all to invest in Breadtalk then. One of my friend (Mr Philip Comd) said this to me:
“By the time their franchise business become successful, the share price would have gone up”.
I replied that it may, but still the important question is whether that “gone up” price is under or over-valued relative to its growth! Price by itself means nothing. It has to be compared against something else. This means that I will invest if my analysis shows a change in Breadtalk's fundamental, and Mr. Market might missed it. It happens many times. We cannot invest base on hope or luck just like visiting a casino.
In Dec 2006.....
To be continue……...
I am never a businessman, but I would do at least all of the above. It's really common sense, although my lecturer used to say that "common sense is the least common human attribute". Anyway, if you just want to “trade the paper”, then this article will be irrelevant to you. Now, Warren Buffett and Peter Lynch are real expert when it comes to evaluating a company’s business and its management team. Even though we may just buy only 0.01% of the company’s shares, it should not stop us from using their approach. If time is what you don’t have, then I have a suggestion - pay me and I’ll do it for you.
A True Testimony – Creative Technology
If I remember correctly, a few years ago, an article appeared in the Fundsupermart.com about a Singapore taxi-driver whose investment turned him into a millionaire. If I can find that article again, I will put it on my blog. What happened was one day, this taxi-driver pick up Mr Sim (COE, Creative Technology). Singaporeans should know this man, a poly-grad who turned a company into one with large global market share and dual listing in Nasdaq (likely to be delisted from Nasdaq this month) and SGX. Both of them had a wonderful conversation during the rides and this tax-driver was deeply impressed with his humble customer. One thing for sure, the tax-driver is not an investment analyst, and most probably not a CFA charterholder. But he based on one simply principle that have been highlighted by Warren Buffett over and over again – you invest in a company that is run by a CEO of a such character that you want to marry your daughter to him. The taxi-driver and Mr. Sim's chit-chat session was not long, and the investment decision may look hasty, but that’s not my point.
For those who have been active in local stock market for last 10 years should know that Creative Technology’s share went up from about US$5 a share to nearly US$70 a share in late 90s. That taxi-driver must have invested more than S$100,000 in Creative Technology based on one man’s character. One more highlight, Creative Technology's share price has dropped to near all time low right now due to continuous disappointed earnings. But again, that's not my point.
How To Evaluate A Business?
Firstly, we must accept that our evaluation will be much simpler as compared to Warren Buffett or fund managers. If you tried to do exactly what they are doing, I am afraid that is not going to be possible. You don’t believe? Ok, try to make an appointment with a listed company’s investment relation manager and tell him that you intended to buy 10 lots but you like to interview him first. There are a few reasons why we (retail investors) just can’t be as complete or receive as much information as we want compare to fund managers. For example:
- Warren Buffett buys a controlling stake in a company. Fund managers may not buy controlling stake but the size would be large. Retailers? Ten lots, may be twenty or more. Therefore, you will receive different treatment from the company’s management.
- Information that a company is willing to reveal is likely to be different between meeting Warren Buffett, a fund manager or investing public.
- You can be sure that warren Buffett and fund managers have sophisticated systems/sources to assist them in their evaluation. Retailers? We can’t even afford wirenews at home.
The good news is that there are other things we can do to compensate our shortcomings:
1) Be vigilant
Keep an open eye when you go shopping. Don’t just get entertained, you may make big bucks just by being observance. Let me share a living example. A few years ago, Jurong Point (JP) was not as big as it is today. When JP officially opened for business, I thought the shopping mall will not be impressive. This is because its customers will make up of mainly factory workers, and may probably damage its image. Subsequently, I witnessed how JP grew and expanded its floor area by enlarging the shopping mall. Today, even with its expanded underground carpark, finding a parking lot requires huge amount of luck. Besides the parking lot, finding a seat at the food court “Kopitiam” also requires luck and patience most of the time. There was never an empty space/shop inside JP. Without talking to the management, what I seen with my own eyes is more than enough for me (and my friends) to call a buy on JP (jointly owned by Lee Kim Tah and Guthrie). And true enough, both Lee Kim Tah and Guthrie reported continued rental growth from JP. We made some profit out of it.
2) Take note of aunties’ and uncles’ gossips.
How many times have you heard friends and colleagues commenting or cursing a product or a company vigorously? So what do you do with it? You join in the fun and then you forget about it? Well I don’t. If a few persons said it, it may not be true. But what if you heard again and again from different mix or locations? Then there could be some truth in it. When Breadtalk was listed in 2003, its share price surged more than 50%. Their business concept was quite innovative and fashionable, and many people like it. And I heard the following gossips frequently:
“wah, Breadtalk employ many young girls….”
“eh, that spicy bah hoo (flosss) bread is really nice…..”
I patronized a few of their outlets. I found that the above two statements were true. The bread is nice to eat, but every outlet is heavily staffed. Labour costs would be big problem in a competitive market where you can find many other popular confectioneries such as Bangawan Solo, Four Leaves, Prima Deli etc. In addition, most outlets are located at pime areas, so rental expense will be scary. And after we monitored and study their progress, we decided that Breadtalk should be avoided. Why were we interested in Breadtalk then? Answer - their franchise business. A franchise business model is a wonderful model which had created empires such as MacDonald and 7-11. I knew this long ago but Breadtalk’s progress was not exciting at all. Thus I was unable to differentiate Breadtalk’s business as compared to the rest. There was no reason at all to invest in Breadtalk then. One of my friend (Mr Philip Comd) said this to me:
“By the time their franchise business become successful, the share price would have gone up”.
I replied that it may, but still the important question is whether that “gone up” price is under or over-valued relative to its growth! Price by itself means nothing. It has to be compared against something else. This means that I will invest if my analysis shows a change in Breadtalk's fundamental, and Mr. Market might missed it. It happens many times. We cannot invest base on hope or luck just like visiting a casino.
In Dec 2006.....
To be continue……...
