Are You Suffering From This Stock Picking Disease?

Over the past few days, I have been actively trying to refine my stocks selection techniques. As a perfectionist, I have a tough time doing it because I am just unsatisfied with the techniques/criteria that I have for stock picking.

Giving myself a break, I picked up the book "You Can Win" by Shiv Khera. In it, Shiv Khera talked about how some people have never made the decision to take a step forward in life because of their fears. They overthink their situation because they do not want to make a wrong decision. In the end, they end up where they are many years later. This is described by Shiv Khera as "paralysis by analysis".

After reading this book, it dawned upon me that there are times when we try our best to search for the 'perfect stock'. The stock that will appreciate in price, ten or twenty folds within the shortest period of time. As a result, we end up doing nothing for a prolonged period of time even though great investment opportunities presented itself to us countless times. However, take note of this, I am not advocating you to randomly buy stocks without analysing them. What I am trying to say is that many of us suffer from "paralysis by analysis".

We tend to over-analyse a stock because we are afraid of it trading so cheaply and because of this, we refuse to initiate a position for a long time. Then when the market price finally catches up with the value of the stock, we knock ourselves on the head for failing to buy the stock.

I feel that the best method for overcoming this hesitations that we have when initiating positions in a stock, is to have a framework/checklist for selecting stocks. A checklist will help us to understand ourselves better and the reasons for choosing the stock. Furthermore, it will also help us to take out some of the emotions in investing as it forces us to look at facts for the company.

I hope that this article will help to remind me to act, in the time of maximum pessimism when I am suffering from "paralysis by analysis", especially in the coming bear market which I have no idea when it will arrive.

The Journey To Financial Freedom,
SGInvestingSuccess  

Income Statement - What To Look Out For?

In the Income Statement, it is revealed to the investors how much revenue and profits the company is currently making. Also, it shows us the expenses that the company has incurred.

When analysing the income statement of a company, I will first look that the revenue growth over a certain time frame. Revenue growth denotes that the company is expanding its market and this creates the opportunity for it to generate more income. Generally, I require the company to have a revenue growth of at least 10% over the period of 7 years.

After which, I will look at the company's gross margin over the same time frame as well. What I would like to see will be that its gross margin is increasing over the years or minimally, kept stable. This shows that the company has the ability to raise its prices up, at least in line with inflation. Similarly, I will glance through the company's operating margin and hope to see that it is above 20% consistently. Having an operating margin of minimally 20% shows that the company has the ability to keep its expenses down and in turn, be able to generate more earnings for its shareholders.

Finally, I will be looking at its net income. Net income should be rising at least in line with revenue's growth rate or faster. Generally, I hope to see that net income will be able to rise faster than revenue because this indicates that the company is buying back shares.

Basically, this is it for my analysis of the income statement. I like to keep this portion really simple and use it as a screener for companies. I want to be able to purchase shares in companies that are growing and is able to keep cost low. If the companies are able to pass this screen, I will then do a more in depth analysis on their balance sheets and cash flow statement.

I want to inform the readers that this is purely my interpretation of the financial statement. It could differ from how you are currently reading the statements and to be clear, mine might not be the best method.

Please do comment below to have an active discussions on what could be improved on! :)

The Journey To Financial Freedom,
SGInvestingSuccess

Who is the Mysterious "Mr. Market"?

For anyone who is acquainted with Value Investing, they would have heard the term "Mr Market" mentioned at least a couple of  times. 

Who is this "Mr Market" and what has he got to do with investing? 

"Mr Market" is an imaginary character who is introduced by Benjamin Graham in an attempt to explain the irrationality and daily gerrations of the stock market. Graham asked us to imagine that we have a business partner who is attempting to buy our business or sell us his business every day. 

Every day, Mr Market will quote us a price for the business. However, Mr Market is manic depressive which means that he will have wild mood swings daily. On days when he is feeling extremely optimistic, he will offer an exuberance price for the businesses that we are holding. Likewise, to buy a business from Mr Market on such days, he will want us to pay a hefty sum for it. On the other hand, on days when Mr Market is feeling depressive, he will offer a low price for the businesses that we are holding and for the ones that he is selling to us as well. Luckily, we are free to ignore or accept Mr Market's offer whenever we feel like it and Mr Market will just come back every day with a new offer. 

I believe that from this analogy, Graham is trying to teach us to ignore the daily fluctuations of the stock market and only to focus on the underlying fundamentals and valuation of the businesses that we are holding. 

To put in the words of Benjamin Graham: "In the short term, the market is a voting machine but in the long run, it is a weighting scale." This is to remind myself daily, to prevent getting caught up in chasing performance for the short term and to have a long term view of holding quality businesses.

The Journey To Financial Freedom,

SGInvestingSuccess

Look Out For Value!!

Yesterday was the first day of IT Fair. Since I was rather free, I decided to go down and take a look because I have been wanting to get a new laptop. Went down and there were a multitude of selections! I am not tech savvy at all and there was no way for me to determine which laptop I wanted. Instinctly, I wanted to get the most value for money! There was no brand loyalty but only a price comparison; trying to get the best performance for the cheapest laptop.

When I got home, it got me thinking. This is the same as stock selection. We should be trying to get the most value for our money. Finding the high quality companies that are selling at a cheap price - not getting too emotionally attached to a stock/company. I feel that this is the biggest mistake that people, including myself, make when selecting which stock to buy. When a stock becomes cheaper, inevitably, we feel that the company is undergoing a crisis and avoid the stock at all cost.

In my short investing journey, I have witnessed this event occurring over and over again. For example, look at all the oil companies that are trading on the stock market - Everyday their prices is decreasing as if the companies are going to go out of business really soon even though their business models are still intact and in fact, they are trying really hard to grow as a whole. While stocks like Amazon are trading at exorbitant prices even though they are not making any money year over year. Of course, I'm not saying that people who buy Amazon are wrong but rather we just have a different perspective on how we value a company.

Since I subscribe to Warren Buffett's style of investing, finding companies that have growing earnings and cash flow is extremely important to me and that is always the first metric that I look at on the financial statement.

To put it in the words of Warren Buffett: "Price is what you pay, Value is what you get".

The Journey to Financial Freedom,
SGInvestingSuccess

What is a Good Stock to Own?

When we buy shares in a company, we are buying into a part of the business. If the business do well, the share price will follow because the company becomes more valuable due to its capacity to generate more revenue and earnings.

Question: How do we determine which company will do well in the future?

Answer: The company that has the most sustainable competitive advantage. 

What is competitive advantage? Basically, it refers to the company's ability to prevent competitors from entering the market and eating up its profit. Without much competition, the company is able to protect its excess profits and use them to generate extra returns for its shareholders.

MorningStar catergorised competitive advantage into 5 different sources: Intangible Assets (Brands, Patents), Cost Advantage (Low Cost Producers), Switching Costs (Softwares), Network Effect (Everyone is using it!) and Efficient Scale (Distribution).

Companies that have at least one or more of these sources of competitive advantage are usually a good bet for the long term as they have the ability to create value into the future.

Personally, I use this as my primary screen for stocks. I'll ask myself, is this company going to thrive 10 or 15 years from now? If so, which source(s) of competitive advantage does it display that will allow it to do so?

Please do comment below to let me know where I can improve on! :)

The Journey to Financial Freedom,

SGInvestingSuccess

How Safe Are You?

"Margin of Safety" - The Three Most Important Words In Investing

Imagine that you're being tasked to build a bridge and the maximum weight that it should be able to hold at any one point is 10000kg - Would you build a bridge that can support 10000kg or a bridge that can support 15000kg? I bet you would choose the latter and the reason for it is probably because it is "safer".

This is known as the "Margin of Safety" and the concept can be applied to investing as well.

What I am actively seeking out for is a minimum margin of at least 30%. This means that in order for me to purchase shares in the company, the company must be trading at below 30% of it's calculated true worth. The "margin of safety" allows me to make errors in my calculations, mitigating downside risks and yet at the same time, increases my rate of return if I am right in my estimations. Truly, this is a concept that allows us to experience the best of both worlds!

                                      

A point to note - having a "margin of safety" does not ensure that all your investments will be successful but rather, it increases the likelihood of doing well because it takes into account mistakes in our judgement.

Please leave your comments to let me know where I can improve on :) as well as any topics anyone of you would like to find out more about in investing!!

Journey to Financial Freedom,
SGInvestingSuccess

Defining Your Own Circle of Competence

What is your own Circle of Competence?

Warren Buffet defined "Circle of Competence" as knowing what you buy and only investing in companies in which you understand how they operate and earn money. For me, I am still trying to rapidly expand my circle of competence in order to understand how companies in different industry operates and the measures thah they use to achieve growth.

My investing journey has been short but there are many times in which I am tempted to stray outside of my circle of competence; trying to invest in technological/biomedical companies because of their high growth potential. However, I have always failed to understand their valuations and the ways these companies generate revenue. Fortunately/Unfortunately for myself, because of my inability to understand their valuation, I have not invested in any of these companies yet. Nonetheless, I'm not saying that nobody should invest in technology/biomedical companies but rather, this is up to individuals. It depends on how comfortable you are with the industries and whether you're able to comfortably establish what will the industries be like in a couple of years.

Everyone's circle of competence will be slightly different and in my opinion, it does not matter what or how big your circle is. Rather, I believe it's how well we understand the industries/companies that are within our circle in order to avoid investing mistakes. As what Peter Lynch mentioned, if you cannot explain the business model of the company within two minutes, you should not invest in it.

Writing this post serves as a reminder for myself to only invest in companies that I know well and to stop looking at speculative companies that I do not even understand!

Journey to Financial Freedom,
SGInvestingSuccess