Wednesday, April 09, 2008

Approaching Investing in a Business-Like Manner

I've been rather busy the past few days, which explains the lack of posts. Anyhow, today I will be exploring how one should view investing, with regards to value investing in particular. Investing is actually part and parcel of growing our wealth, albeit slowly and steadily instead of instantly. Thus, the attitude one should take when approaching this important activity should be one of utmost seriousness, which is why the title mentions "business-like manner".

So what exactly does business-like manner mean ? This means observing a company as if you are a stakeholder who wishes to do business with the company, or acquire the company. Think of the company as a business and examine all facets of it. First of all, one should apply what I call a "common-sense" view of a business, by examining the nature of its principal activities. Companies which are in "commodity" businesses or those with a weird business model (a.k.a. something overtly innovative and which has no history of commercial success) should be shunned because it is unlikely that they can sustain increased earnings or ensure steady and predictable profits.

This is what I consider the “raw filter” for assessing companies for investment purpose. By using common sense to review whether a business has endearing characteristics or not, one can then make a conscious decision to pick and select the better businesses to drill down in detail. The SGX has over 700 companies listed on it and it will be impossible to drill down into each one as it would be too onerous and impractical. Finer filters can then be applied to assess the fundamentals and prospects of each individual company so as to ascertain its merits and demerits. One can then apply Phil Fisher’s 15 basic criteria as well to ask oneself if a particular company is investment-worthy. I shall be starting a new series soon on each of Phil Fisher’s tenets to elaborate and give examples, so watch out for it !

By adopting a business-like attitude towards investing, one can approach companies from a more practical stand point to see if their business will be viable and sustainable in the near to medium term. Of course, any events may occur which may cause our initial assumptions to be invalid, but detailed research and in-depth reading about the company’s industry and the company’s financials should mitigate such risks. Still, there will always be residual risk in any investment which cannot be eliminated, such as Acts of God (e.g. fires, floods, earthquakes and typhoons) and also deliberate and pervasive fraud. This is why the margin of safety concept always applies to protect the investor from massive losses, and how it will always remain a central concept in value investing.

Note: Ezra has just released their 1H FY 2008 results yesterday (April 8, 2008). I will be doing a 3-part review of their financial statements and ppt presentation in my subsequent posts.

No comments: