Earlier in the week, we received a great question from one of our readers. This question was made in response to my article on how a small investor can beat the Great Financial Crisis. The question was: I’m a novice at investing. How do I start to study companies? (i.e.) The homework before buying shares? Well, first off, let me congratulate the intrepid reader for choosing to take the path of studying businesses. Though it may not sound like much, but my personal observation has been that a surprising amount of folks are often too eager to buy…
Earlier in the week, we received a great question from one of our readers. This question was made in response to my article on how a small investor can beat the Great Financial Crisis. The question was:
I’m a novice at investing. How do I start to study companies? (i.e.) The homework before buying shares?
Well, first off, let me congratulate the intrepid reader for choosing to take the path of studying businesses. Though it may not sound like much, but my personal observation has been that a surprising amount of folks are often too eager to buy shares without even knowing the business behind them. So intrepid reader, give yourself a pat on the back!
To help answer the question, I have three suggestions below on how to start, so let’s begin.
1. Make a thesis with a crayon
Legendary investor Peter Lynch, who achieved annualised returns of 29% for 13 years in his career as a fund manager, once said “Never invest in any idea you can’t illustrate with a crayon”.
Now, before you rush off to buy some paper and crayons, bear in mind what’s at the heart of his statement: A new investor should consider starting with companies which are easy enough for him or her to describe with just a few sentences.
As Foolish investors, our goal is to invest with the long term in mind. When we invest with a long time horizon, the business that’s being considered should be easy enough for a new investor to evaluate from the start, and over time.
So, if an investment thesis for a company does not become clear after a few reads, the new investor is probably better off tossing it to the “too hard” pile. Use this pile often.
2. Take notes!
The new investor has many sources of information nowadays and they’re often found with just the click of a mouse.
One such source of information would be the investor relations web page of a company. Here is the website for Starhub Ltd. (SGX: CC3), in which you can find transcripts of the company’s management team explaining the business and recent industry developments.
Another source of information could be a website like Morningstar which provides a great long term view on financial information for many different companies. In this instance, a quick look at the 10 year financial track record for a company like VICOM Limited (SGX: V01) can tell you a lot. In this example, Vicom’s profit grew throughout the Great Financial Crisis of 2007-09, suggesting that its business has a certain resiliency even in recessionary times.
To be sure, there are many other sources of information other than what I’ve shared. But, these sources – as important as they are – are in second place to something else.
And that something is the act of taking notes.
If there is one single thing to remember from this article, it will be this: One of the biggest advantages we have as long term investors is the accumulated knowledge that we gain from holding different companies through thick and thin.
So, start collecting all the information you can gather into a folder over weeks or months, and when you are ready, spend a quiet Sunday afternoon to bring everything together. Try to form a strong long term investment thesis for a company. After studying the history and track record of a company, remember to also look forward, like what my colleague Ser Jing has outlined here.
3. Be Motley!
One of the most celebrated values at the Motley Fool is the differing perspectives we have for each investing idea.
For example, a company like Singapore Exchange Limited (SGX: S68) may warm the hearts of the Foolish dividend investors among us due to its relatively high dividend yield (3.9%) and abundant free cash flow. On the other hand, it may not excite the Foolish growth investors, who may note down the company’s inability to grow its top-line. From the growth investor’s point of view, Singapore Exchange’s revenue of S$687 million in the past 12 months is still a fair bit lower than its revenue of S$769 million achieved in the fiscal year ended 30 June 2008.
The key here is that you should embrace the “Motley” opinions. Embrace the differences.
Incorporate the relevant differing opinions to your investment thesis for a company. It can be hard to embrace differences, but the “Motley” opinions are likely to challenge your investment thesis for a company and help you to think more broadly. If anything, you will likely come out with a stronger, better-rounded thesis in the end.
Foolish Bottom Line
Most investment theses often start out as fragile ideas. There are often a lot of unknowns about a company’s future.
However, intrepid new investors should take comfort from the fact that it does not take a perfect thesis to pick a multi-bagging share. I certainly didn’t have the perfect thesis for my companies when I first started out.
Accumulating knowledge for the long term might eventually lead you, as an investor, to be better at identifying patterns of success. With those patterns, you may just find the investing success you seek.
As lifelong students of the investing game, be sure to report back and share what you learn, and we may all be better enriched for it. I know I will be. Fool on!
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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.