Let me explain.
I recently visited a new-opened restaurant in Singapore. The eatery claims to serve European cuisine at realistic prices. That, for me, is like waving a red rag in front of a bull. Or in investing parlance, it is like wafting a stock with a 7% yield under the nose of an income seeker.
My “Eureka” moment
The prices, as the restaurant claimed, were indeed realistic. But the analyst in me couldn’t help wondering how the business made money. How did shareholders earn a return on their investment?
My “Eureka” moment came when I asked for a cup of tea at the end of my meal.
The waiter politely informed me that the restaurant did not serve tea. Nor did it, he politely pointed out, serve coffee. He then politely asked if he could bring me my bill, as I appeared to have nothing in front of me left to eat.
From start to finish, polite efficiency was the order of the day. No sooner had I ordered my meal than the starter materialised. And as soon as the last drop of soup had passed my lips, the main course appeared.
The restaurant, you see, makes money by turning over its customers quickly. So, serving tea or coffee at the end of a meal would defeat the purpose.
Thing is, the restaurant keeps its prices low, which means that its profit are probably wafer-thin. But to compensate for the low margins, it must sweat its assets harder to achieve a decent return.
That is why it does not serve hot beverages at the end of the meal. In the time that it would take a customer, such as me, to sip my inexpensive cup of hot tea, the restaurant could have served another diner with a pricier main course.
They key to the restaurant’s success is focus. Every member of staff has to concentrate on the goal, which, in the case of the eatery, is a high return on asset – the higher the better.
As investors, we need to be focussed on the “big prize” too. We need to know where we are today and where we would like to be, financially, by a certain stage in our life.
We also need to have some idea of the key variables – even if they are guesstimates – if we are to avoid getting lost in the mazy world of finance.
Income or growth
For some investors, the goal could be to achieve a retirement pot of S$1 million by the time they reach 55 years of age in 30 years’ time. For others it could be to generate a recurring income from their retirement fund after they stop work.
These are laudable objectives. What’s more, the stock market could provide the means for you to achieve your goals – whatever they might be.
Growth investors might focus on companies that have the potential to significantly outperform the market. Companies such as Raffles Medical (SGX: R01), BreadTalk (SGX: 5DA) and Super Group (SGX: S10) are some examples of stocks that have grown considerably over the years.
But growth investors are also aware that with higher growth comes a higher level risk. As these companies are expected to grow quickly, any hint of a slowdown could be punished by an unforgiving market.
Income investors tend to be more sedate. Consequently, they could lean towards more mature companies that have the ability to pay out a significant proportion of their profits to shareholders.
The best of both worlds
As for me, I like a bit of everything. Consequently, I have deliberately built a portfolio of growth and income shares. I even have a handful of speculative shares to make life a bit more exciting.
Achieving our financial goals is within everyone’s reach. But to attain our objectives we have to start today. Not tomorrow. Not the day after but immediately.
So, begin by building your investment portfolio straight away. And stay focussed, whatever might happen in the markets around you.
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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.