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How To Win The Guessing Game

The Motley FoolHere’s a challenge that I think you might enjoy

Pick up a newspaper and turn to the business section. If you prefer, you can poke around one of the many financial websites instead. It doesn’t really matter what media channel you choose – the results are likely to be the same.

After a few minutes of reading, I am sure you will come to the same conclusion as I do – the investing world is full of uncertainty. I call it the guessing game and the media just loves playing the guessing game.

So what exactly are experts spending their time guessing at the moment?

The big question mark?

In the US, a big question mark hangs over the precise moment when Ben Bernanke will reduce the amount of financial support he will give to the American economy. In other words, when will Bernanke take his foot off the gas?

Analysts are going through every sinew of economic data to try and second-guess when that might happen. They are poring over house-price data, unemployment numbers, non-farm payroll figures, car sales, retail sales and inflation figures sniffing for clues. Every man and his dog now seem to have an opinion.

Incidentally, that is only the tip of the iceberg of data that analysts are sifting through. What a waste of time and effort. When Bernanke is ready to taper, he will do just that. And no amount of sifting, poring, combing and trawling by analysts will change that.

Meanwhile over in China, analysts have another heap of data to dig through. This time they are trying to guess when China’s consumers will take over the burden of driving economic growth. They are building complex models to second-guess whether China will have a soft or a hard landing.

The sleeping giant awakes

If the issues in China and the US were not enough to fill their time, analysts still have to contend with the on-going problems in Europe. Almost half a decade has passed and Europe is still muddling through its sovereign debt issues, slowing economic growth, high unemployment and pockets of social unrest.

And now, analysts have another bunch of numbers to play around with, thanks to what is going on in the Land of the Rising Sun. The Bank of Japan has awoken the sleeping giant by embarking on Quantitative Easing on a monumental scale. It plans to double the amount of money circulating around the Japanese economy in the hope of stoking inflation within the next two years.

So, take your pick. You can choose to worry about what is happening in China and Japan in the East or fret about the problems in the Eurozone and America in the West.

What’s for dinner?

But here is something that I hope could change your mind.

Some time ago, I planned to have dinner with a few friends in Cambridge. I couldn’t quite decide whether I should book a restaurant or to leave it to chance. After all, the UK was flirting with a double-dip recession, at the time. So what were the chances that restaurants would be busy?

However, being the cautious person that I am, I chose to err on the side of safety. I booked a Chinese eatery in the town centre that I knew well and liked. When we turned up at the restaurant it was positively heaving. Thank goodness for being cautious.

I even had a quiet chuckle as we sailed past other patrons who didn’t have the foresight to book in advance. They had to wait patiently outside for the diners inside to finish their meals and vacate their tables. Curiously, other restaurants in the area were barely a quarter full.

The moral of the story is that some businesses have built deep and well-defined moats around their operations. Start by looking at the companies that make up the Straits Times Index (SGX: ^STI). See if you can identify the moats that make companies such as Jardine Matheson (SGX: J36), Keppel Corporation (SGX: BN4)  and Genting Singapore (SGX: G13), special.

The secret ingredient

These moats allow companies to defy downturns even when others are suffering. They appear to have competitive advantages that allow them to not only maintain healthy margins but also to grow sales at a time when others are slashing prices to stay in business.

Being able to identify resilient businesses that stand out from the crowd is one of the keys to successful investing. It doesn’t happen by accident though – nor is it down to luck. It comes from painstaking research and analysing how a business functions. That is what we love to do here at The Motley Fool.

Incidentally, are you curious as to why the Chinese restaurant was so much busier than other restaurants in the vicinity?

It’s because the chef has a master stock that has been developed and maintained over time for cooking its prized chickens and ducks.

So the next time you are looking for prospective investments, look for the secret ingredient that makes the company tick. Look for the sauce. It’s always about the sauce.

This article first appeared in Take Stock – Singapore.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock — Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.