Sunday, 25 August 2013

Good company = good investment??

As an investor that emphasise on fundamentals, I take the company's financial robustness, earnings potential, cashflow-generating ability and management integrity etc into consideration while deciding if a company is worth investing in.

Let's rewind back to end 2007. SGX is a good company! It is THE monopoly in the securities clearing and derivatives trading industry in Singapore. There is no competitor! Every single of our investment transaction is contributing to SGX revenue. Hence it has a wide moat! Let's invest in it at a price of $16!

Fast forward to present days. SGX stock price is languishing at $7.30.An investor entered at $16 would have seen its stake halved.

Eh, what happened here? Didnt I invest in a solid company? Why did my money still vanish into air??

Here is the crux: we often mistake good company as a good investment, that so long if we buy into fundamentally-strong company, we will earn a profit eventually and sleep well at night. However, this is far from the truth!

A good stock/company does not necessarily mean it is a good investment. Finding a solid company is one side of the equation. Deciding on a opportune time to buy a share in the company, is the other side of the equation, and often a more tricky one, because many other factors come into play, such as the timing, investor psychology, investment objective etc. The most important factor among them, I feel, is price.

Simply put, a company/stock can be a fantastic counter. But that is just on paper. It will only be a good investment at the right price, a price low enough that it offers you a great enough reward-to-risk ratio, with high probability of its price rising.

This is where I learned an important concept from Master Your Finance seminar: use both Fundamental Analysis and Technical Analysis to evaluate an investment opportunity. I re-phrase this to: Fundamental Analysis tells me what to buy, Technical Analysis tells me when to buy.

Finding a company with strong fundamentals is not sufficient. It has to be at a suitable or a low enough price to be a good investment. Such opportunities are often found during market crash (Yeah market crash!), when a temporary bad news hit the industry, at the bottom of its cyclicality etc.

I maintain a watch list of solid companies which I monitor their price movements closely. I have already found what I want to invest in (from the list), and am waiting patiently for a good time when I can buy cheap (through the close monitoring of price movements).

However, in some ambiguous case, I do have a general rule that applies across all counters to aid me in decision-making. I will not invest in any counters with a PE of above 20. As I feel that waiting 20 years to recoup my capital from an investment, and an earnings yield of 5% is not a good deal at all.

In short, use fundamental analysis to find efficiently-run companies, use technical analysis to decide when to jump in. However, I would still give priority to FA, as it is highly risky to buy based on TA alone, which means speculating. Counter may be very volatile and may just rot and go bust.

Meanwhile, control itchy fingers, learn to sit still, and remain patient. Sometimes doing nothing can be the best strategy. :)

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