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Weekend Kopitiam Adventures and Why it Matters to Investing

food

Over the weekend, I found myself standing in line at Clementi for some succulent “Bedok Chwee Kueh”. My indulgence was going to be four pieces of the white steamed rice cake, topped with preserved radish. There were four people in the line, and I was second in line. In short, the good stuff was close, and it was going to be good.

As it turned out, the lady in the front of the queue decided to place an order for 40 pieces. Strangely, she told the store owner that she wanted the 40 pieces “cold”. This was the first time I heard a person order that way before. This was followed by another lady, two places behind me, ordering 20 pieces — also “cold”. Quizzically, the third lady on the line asked about the “cold” chwee kueh.

So, apparently, you can order the rice cakes which are not steamed (hence “cold”) so that you can keep them refrigerated and steam it up later when you want to eat it. Soon, the third lady decided that she also wanted the “cold” ones.

Safety in crowds

This reminded me of what investing legend Peter Lynch used to say of mutual fund managers. Mr. Lynch made his name with the Fidelity Magellan mutual fund (the equivalent of unit trusts here in Singapore) in the USA, leading it to 29% compounded annualised returns over 13 years. To achieve that, he often looked for the boring, less covered companies such as La Quinta Motor Inns as opposed to more popular names such as IBM. His reasoning was simple, as he recounted in his book One Up on Wall Street:

There’s an unwritten rule on Wall Street: “You’ll never lose your job losing your client’s money on IBM.” If IBM goes bad and you bought it, the clients and the bosses will ask: “What’s wrong with that damn IBM lately?” But if La Quinta Motor Inns goes bad, they’ll ask: “What’s wrong with you?”

It is possible that in the absence of any other information, humans tend to find safety in large crowds. The investing legend’s argument was that this applied to the share market as well where folks, even professional fund managers, tend to follow shares which are perceived to be “safe” because they were popular.

Safety in Singaporean crowds

We see this in the local SGX share market as well.

My colleague Ser Jing has highlighted the stunning 3,980% rise in share price for Blumont Group Ltd (SGX: A33) from August 2012 to September 2013. It would appear that speculators decided to pile on just because everyone else was. Unfortunately, the numbers which truly mattered in the end for Blumont Group was not its share price – it was its head-scratching valuation of 500 times earnings and 60 times book value near September 2013. The share price for Blumont Group has since taken a round trip – it’s now around 33% below where it started in August 2012.

Instead, if investors had looked at a company with less pomp but comes with free cash flow and no debt, like Boustead Singapore Limited (SGX: F9D), they would have been up by 28.5% over the same time frame. Boustead Singapore currently trades at a price to earnings (PE) ratio of 13.3 which is lower than the PE ratio of around 14 for the SPDR STI ETF (SGX: ES3). The STI ETF is a proxy for the Straits Times Index (SGX: ^STI).

Foolish bottom line

It pays to be aware of the natural tendency within each of us to follow what the crowd is doing. There are times when the wisdom of smart crowds prevail (like where awesome food is!). However, the thing that matters in the end is really your own reasoning for owning a share of a company. In other words, as Peter Lynch would put it:

Know what you own, and know why you own it.

In case you were curious, I still had my four pieces of rice cakes steamed. But it was because I was hungry.

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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.