Wednesday, June 27, 2007

Research Series Part 1 - The Importance of Independent and Objective Research

In a new series I am introducing (I have another series on investment mistakes which is up to Part 2 so far), I will be touching on aspects of objective research and how to go about doing fundamental analysis for companies in order to ascertain fair value, and estimate intrinsic value. For those who think it is simple, let me clarify by saying that it is not rocket science, but neither is it easy as it involves a lot of hard work and long hours of reading. One thing I can assure readers is that the hard work will eventually pay off !

Part 1 will touch on the importance of getting independent and objectively verifiable research. As I have mentioned on my post about tips, rumours and hearsay, we often get information overload in our daily lives and we have to constantly filter out the important information (usually only 1% of what you hear) from the crap (the other 99% !). Doing research conscientiously means equipping yourself with the neceesary knowledge and information to enable you to make an informed decision. This is in contrast to the so-called off-the-cuff decisions made by punters and traders as they predict the market's next movement. Most of the time, information based on tips and rumours are unverifiable and it is highly risky to speculate in something in which you have no control over, and which you don't fully understand. There are obviously people who claim to understand market and human psychology but this blog is not going to touch on this aspect as this is, after all, a value investing blog.

Independent research is defined as research which is obtained from objectively verifiable sources. This would include an accredited website such as a news or editorial website, newspapers, business magazines and/or publications. This research may be of a macro or micro nature and may or may not be specific to the investment which you may be eyeing. One must be selective about what one reads because theoretically, it is impossible to read everything. Thus, one may wish to concentrate on news involving the general health of the economy, inflation rates, unemployment statistics, industry analysis, market commentaries and analyst reports. Also take note that some reports may be written from a personal point of view and may contain opinions which are not representative of the general public. It is up to the discerning reader to distinguish between slanted opinions, and bare facts. One has to put on his thinking cap as well and not just read blindly into everything. This is the essence of objective research which I will touch on in the next paragraph.

Objective research involves research into the facts and figures such as employment data, CPI, GDP growth rate for the economy, as well as profit margins, revenue growth and earnings per share data for companies. Objective information should not be tainted with subjectivity, meaning that the data obtained has to be rigorous and should be free from bias. Thus, reports obtained from government agencies such as MAS are the most accurate as they are considered reliable sources and are "untainted" by possible editing or amendments. For companies, most of the information can be obtained through SGXNet, OPERA (for prospectuses and OIS) as well as company websites. The Annual Report is a good report to start off with when researching a company, but I will touch on that in future parts.

The next thing to do is to collate all this information and READ it thoroughly. It will be useful to make notes or use bullet points to help to summarize the large volume of information available, and it also helps to channel and focus the mind in order to make clearer, unbiased decisions. Consulting a friend or relative may be useful but a word of caution here: make sure that your friend's objectives and investing philosophy are in tune with yours; otherwise there may be conflicts and vast differences in opinion on how to evaluate a piece of news or fact. Absorbing information is a key "job" for a value investor, as he has to have knowledge on many aspects which may affect his investment.

Finally, here comes the hardest part. We have to analyze and decide if the information presented would culminate into a good investment decision. This is probably the most difficult part of the research process. Don't be too disappointed if you make mistakes initially (as I did) because mistakes help you to learn and avoid similar mistakes in future.

Next in the series will be how to do industry-specific research on a company and the factors to look out for in the macro-economic environment. There is no confirmed date where I will post part 2 but just keep checking back daily. There will be other posts in the meantime to satisfy your time.


la papillion said...

eagerly awaiting your next posting :)

Anonymous said...

Intrinsic value involved calculations such as growth rate, dicounted rate and how long the business will last. To have a strong case for investment, these must be evaluated conservatively.

You care to estimated for Pac Andes?

Reading alot and hardwork is given. Other critical considerations include business trends and competitions, management integrity etc.