Thursday, January 20, 2011

Pace of Research

As I sit here facing the new year with a mixture of delight and trepidation, I begin to muse over the financial resolutions I had made at the close of the previous year, 2010. One of them was to engage in research and reading in order to unearth more companies to invest in, and I had mentioned that I would devote more time to this pursuit. However, a friend of mine told me the other day about the importance of family time and values; and to be honest, my wife has been complaining incessantly about my time spent at the computer doing research and reading of annual reports. This made me think about what was truly important in my life – making money and financial freedom, or previous time with my loved ones including my daughter. I guess it’s no point being financially free if your family is fragmenting before your very eyes!

Which brings me to the point of this post – that research into potential companies to invest in need not be undertaken in a hasty, rushed manner. My previous detailed research into SIA Engineering company was done in a mere two weeks, and involved a lot of late nights poring over annual reports, compiling numbers and reading and crunching facts and figures. One of the main reasons for the rush job was because I was hasty to deploy some capital, which resulted in some fatigue and perhaps some biasness towards accepting the data and information gathered (commonly known as selective retention in marketing literature). Part of me was also afraid that valuations would continue to climb higher, thereby making a purchase difficult due to the decreased margin of safety. As it was, valuations were already not exactly cheap for SIAEC as it was a blue chip, but further dragging of feet could have resulted in valuations which were even more demanding. Hence, there was a concerted effort undertaken by myself to hurry up on my research to produce a credible report on which I could base my investment decision on.

I now realize that this logic is rather flawed, because if valuations are demanding then the purchase decision should be postponed, and the company can be placed under a “tracking” or “watch” list, to be purchased only when there is a market crash or if valuations become depressed for some reason. The idea of being an investor is being able to wait for the big fat pitch, and then swing when it comes along. To this end, patience should be an enduring virtue possessed by the successful investor; and I realize I may have lacked this when I did my SIAEC research. The pace of research should be slow and relaxed, as one needs time to absorb, digest and analyze disparate pieces of information gathered from various sources, in order to collate them into a coherent investment thesis. The investor’s job is to make sure the business he is researching is understandable and simple enough to digest, and he should ensure he gives himself enough time to read and understand the business model. By giving yourself enough time and space to understand and appreciate the inner workings of the business, as well as possibly arranging for a meeting with the Management and Directors to further delve into the corporate aspects, one can have a more holistic view of whether or not to invest your money in that company for the medium-term.

Now when I think deeper on this issue, I realize that many companies can sit on the backburner for at least a couple of years while one monitors and tracks the business growth of the Company. This is especially so for the newcomers (i.e. IPOs) which may not have much of a track record. The idea of investing is to ensure you are sufficiently comfortable with the track record of a company and the consistency of revenues and earnings in order to be able to place some money on it. With more time on your hands, you can safely assess companies to see if they conform to your investing criteria in terms of growth, ROE and other metrics; and whether Management has delivered on their promises over the years. Therefore, it is absolutely all right to slow down your pace of research and identify good companies, yet not invest in them immediately. Right now, I am in the process of compiling a list of very good companies which have decent prospects, are able to weather a significant downturn, have strong Balance Sheets and good cash flow generation. Obviously, some of these companies will not be trading at attractive valuations as the economic recovery had already taken place, pushing valuations up higher as compared to during the Great Recession. The idea, then, is to build up a decent laundry list of companies with which you will swoop down on and scoop up significant amounts of shares when their share prices are forced down in a market crash or economic downturn. Of course, the usual requirements of controlling your fear and greed are always applicable, as it takes a strong stomach to purchase shares during a market crash. However, it does get easier over time as you adjust yourself to a value mindset and adopt the mentality of a business owner. If one thinks this one, one will be immune to the daily fluctuations caused by Mr. Market and able to act quickly and decisively to purchase shares.

One final point to note is that one should also continue to research and read up on companies already existing in one’s portfolio, as these will also be prime candidates for further investment should their share prices drop like a rock during the next downturn. Since you purchased them in the first place, it is assumed that they had already passed the initial intensive screening and will remain as good investment candidates unless something drastic occurs to upset their status as being worthy investments. It is of paramount importance that one assess the investment worthiness of the companies you already own from an objective perspective (though in essence this is nearly impossible as you are already vested), in order to assure yourself that they remain investment worthy.

14 comments:

Chern Kuan GOH said...

Very impt advice =)
I think it is very impt to understand what you are doing before u make any move!

CK

Derek said...

Hi MW,

U remind me of the time when I first started blogging. I remembered telling my gf not to disturb me for a days because of I was too engrossed in blogging. I may have gain results but I could have lost something far more important.

It's easy to plan your time when you are single but now that you have a family, we must always put them as our priority. Go easy on your research, you may make lots of money but family and friendship are priceless.

Cheers!

Musicwhiz said...

Hi Chern Kuan Goh,

Yes, I realize that now. Taking one's time also helps one to think more clearly and mull over a potential investment. Thanks.

Regards,
Musicwhiz

kanglc said...

Please, please share your list of very good companies when you have them. Thanks in advance!

financiallyfreenow said...

Hi MW,

I used to think the same way about price when researching into a company. I used to be afraid that the price of the company I'm researching into will rise so I usually hastened my researching process. This usually causes one to overlook certain aspects of the company. That was what happened during my Dapai purchase. I rushed my research, overlooked some aspects of the company and had me buying into a not-so-good company. I have divested since.

Kudos that we both share the same mindset! Some time back, I also came up with a "watchlist" of stocks with wide moat and strong fundamentals so that during the next crash, I can plough my money into them. I'm still on the lookout for these kind of stocks. With the market catching up so fast, many stocks are overvalued. We can only wait for a major correction or crash to allow us to buy undervalued shares.

Cheers!

Temperament said...

Hi,
I agree. For me it's time to sell slowly whenever there is an opportunity.
In the past, I would have sold more than 70 % of my portfolio already; waiting for the next cycle.
Now as I become older, I become braver(actually greedier).
I don't know whether this is a good or bad sign.
One thing is for sure, I will think twice about buying no matter what.
To be caught by the proverbial Black Swan is no joke.
I may not "die", but to wait for another cycle is really waste of my given lifetime and opportunity cost.
Cheers!

Drizzt said...

i think we can overcome this by firstly taking a 1/4 position into the stock. that psychologically sets the mind that you are invested and you have to be sure.

but i still think the market is ok. not really expensive.

AK71 said...

Hi MW,

I am spending more and more time blogging. I also wonder sometimes if the time I spend blogging is disproportional to the returns I get from the effort.

The blogging comes after researching, of course, be it TA or FA. Very time consuming.

This is a reason why I turned down requests by readers to do FA or TA for companies they are interested in. Time not enough. :(

Musicwhiz said...

Hi kanglc,

I'm having less and less time to do detailed research, so I guess this will be put on hold till I can find enough time.

Thanks,
Musicwhiz

Musicwhiz said...

Hi FFN,

Yes! That's precisely the mindset I was talking about. You have summarized it very well, thanks!

Regards,
Musicwhiz

Musicwhiz said...

Hi Temperament,

Thanks for sharing!

Musicwhiz

Musicwhiz said...

Hi Drizzt,

Yes I did that for SIAEC. Bought into a small position as my research uncovered more and more about the company. I call it buying in phases - no hurry and no stress.

Regards,
Musicwhiz

Musicwhiz said...

Hi AK71,

yep I agree. Should be more of a hobby rather than a commitment. Then it becomes relaxing and not stressful!

Regards,
Musicwhiz

Musicwhiz said...

Hi Derek,

You are right - family and time really are priceless. I will be devoting more energy to them in future.

After all, I am already very comfortable doing what I do and now I can spend less time and effort doing it. I guess you can call it learning! Haha.

Cheers,
Musicwhiz