My Secret Investing Toolkit – Revealed

The Motley FoolThe best thing about being an analyst is you never stop analysing. The worst thing about being an analyst is you can’t ever stop analysing.

For instance, a simple trip to a shopping mall can soon turn into a footfall-count as I gauge the number of people traipsing up and down the corridors. It can be a useful exercise to determine whether an underlying Real Estate Investment Trust is likely to perform well.

How many Zaras?

A deserted mall, for example, is unlikely to convince shopkeepers to part with more money when it comes time to raising rents. People-counting, in my book, is also a much better use of my time than assessing the number of Zara outlets that Singapore can possibly sustain.

Meanwhile, a meal in a restaurant should be a pleasant experience. But in my case, it can turn into mental gymnastics as I estimate the average amount of money spent by diners; the gross margin of the eatery and its asset turnover. I also watch to see how happy the waiters are as they go about their work.

Philip Fisher, who had a profound effect on Warren Buffett, once said that the opinions of people who are connected, in one way or another, with a business can provide an accurate picture of the strengths and weaknesses of the industry.

His no-nonsense approach to investing led Warren Buffett to reveal that his own investing style is 85% Benjamin Graham and 15% Philip Fisher.

Such is the impact of Philip Fisher’s investing philosophy on investors.

Ahoy! Matey

In fact, Fisher not only had a great influence on Warren Buffett but also on Peter Lynch, who puts as much store into intangible qualitative analysis as quantitative number crunching.

Peter Lynch once said: “Every time you shop in a store, eat a hamburger or buy new sunglasses you are getting valuable input.” He went on to say that by browsing around you get to see what is selling and what isn’t.

Fisher encapsulated the simple qualitative technique, which all of us can practice, in his book Common Stock and Uncommon Profits. He called it the “scuttlebutt” technique.

The term scuttlebutt dates back to the 1800s – a time when pirates roamed the seas. It refers to a ship’s water casket, around which sailors would gather when they needed to quench their thirst.  And as most of us know, no one ever stands at a water cooler without sharing a bit of juicy gossip.

Today scuttlebutt refers to the qualitative information that we glean from people in the know. It also refers to the personal information that we, as investors, can pick up simply by going about our daily lives.

Hail a cab

I remember the first time that I boarded a Singapore taxi – it was one of the many blue taxis operated by ComfortDelGro (SGX: C52). From a brief conversation with the driver of the cab, it quickly dawned on me that Singapore’s dominant taxi operator is unlike cab operators in many other parts of the world.

In fact, ComfortDelGro is as much a car leasing and finance company as it is an operator of taxis.

Just work out the numbers for yourself. Take the daily rental charge for a taxi then multiply it by 365 days a year and then times it by the lifetime of the taxi. Now compare the number you get with the initial cost of purchasing the taxi. Not a bad return on investment at all.

That simple conversation helped explain ComfortDelGro’s Return on Equity, which is not only above-average but also consistently above the average return for the 30 companies that make up the Straits Times Index.

Throw out the charts

Scuttlebutt should not be the be-all and end-all of our investing research. But it is an essential part of my investing tool-kit.

It can be a much better way of finding out about a company than poring over endless charts and graphs looking for patterns that only exist in the figment of your mind. As Warren Buffett once said: “I realised technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.

So go out and learn more about the companies that you are invested in.

Talk with the people who work for the company. Chat with its customers. Buy the product. Attend the Annual general Meetings and ask questions. Or as Peter Lynch once said: “A person infatuated with measurement, who has his head stuck in the sand of the balance sheets, is not likely to succeed.

This article first appeared in Take Stock Singapore.

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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.