Bernard Baruch would very likely be an unfamiliar name amongst investors here in Singapore. But, the late Baruch, who was born in 1870, was a very astute investor during his time. In what may be an apocryphal tale, a lady once asked Baruch for some stock tips during a dinner party. His reply was interesting: “I’m not going to give you a few stocks. I’m going to give you a few principles. Just use these and I think you’ll end up succeeding.” The tale may or may not be true. But there is certainly lots of wisdom to…
Bernard Baruch would very likely be an unfamiliar name amongst investors here in Singapore. But, the late Baruch, who was born in 1870, was a very astute investor during his time.
In what may be an apocryphal tale, a lady once asked Baruch for some stock tips during a dinner party. His reply was interesting: “I’m not going to give you a few stocks. I’m going to give you a few principles. Just use these and I think you’ll end up succeeding.”
The tale may or may not be true. But there is certainly lots of wisdom to be found in Baruch’s principles. So, here they are.
1. Only invest in companies whose products you buy every 30 days or less, throw them away and buy them again
Companies that make consumable products that have to be frequently replaced end up crafting a dependable long-term revenue stream for themselves. This allows their businesses to steadily grow and prosper over the long-term.
When a food & beverage outfit like BreadTalk Group Limited (SGX: 5DA), which runs its eponymous Breadtalk bakery outlets, is able to sell one of its signature food items (the pork floss bun) every 10 seconds, it’s perhaps no real surprise to find that the company has been a long-term winner. BreadTalk Group was listed in June 2003 and since the day after its listing, shares of the company have gained 386% in price as compared to the Straits Times Index’s (SGX: ^STI) return of just 125%.
2. How innovative is your company in creating new products and what’s their ability to create pricing power around the new offering?
The world is changing as technology advances. That can mean that a company may lose relevance if it’s not able to innovate and adapt. That’s why innovative companies with pricing power can survive – they’d likely to not go out of business because they’d almost always be relevant in the minds of their customers.
Sarine Technologies Ltd (SGX: U77) is a unique company in Singapore – it’s the only Israel-based firm listed here and is also involved with the manufacture and development of rough diamond processing equipment and technology. That’s quite an unusual line of business to be in.
From 2009 onward, the company has been a hallmark of innovation by coming up with entirely new product lines and upgraded iterations of existing products in every calendar year. These are all done by Sarine Technologies in a bid to allow its customers, the diamond manufacturers (the companies which turn a rough diamond into the polished gems you see in jewellery shops), to increase their profit margins by streamlining and improving the efficiency of the entire diamond manufacturing process.
Such innovation has likely helped Sarine Technologies to be a long-term market beater. Shares of the company closed at S$0.292 a day after its listing on 8 April 2005. Right now, it’s worth some S$2.97 a share, representing capital gains of 917%, which is way ahead of what the STI has delivered.
3. Are people genuinely attracted to the brand?
With an attractive brand, a company would have a large captive audience of customers to sell to. In addition, a brand that resonates with customers can also confer pricing power to a company’s products. Incidentally, pricing power is also one of billionaire investor Warren Buffett’s favourite business traits.
When Buffett was interviewed by the Financial Crisis Inquiry Commission a few years ago, he said the following:
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
So, is there any local company with a strong brand? It’s still early days given that the company got listed only in July 2012, but Neo Group Ltd (SGX: 5UJ) might be one.
The company runs a number of catering brands, namely, Neo Garden Catering, Orange Clove, Deli Hub, and Best Catering. In the financial year ended 31 January 2014 (FY2014), some of Neo Group’s catering brands saw much larger increases in sales as compared to the number of guests served. A logical conclusion would be that its clientele were more than willing to pay up for the company’s catering services, hence the presence of a strong brand and pricing power.
|Brand||Year-on-year sales growth||Year-on-year increase in number of guests served|
Source: Neo Group’s presentation slides for FY2014
If such trends can hold in the years ahead, it would be a strong sign that the company really does own catering brands which people are genuinely attracted to.
Since its listing at a price of S$0.30 per share, shares of Neo Group have jumped by 210% to S$0.93 today.
Foolish Bottom Line
Baruch’s tale apparently had a happy ending – the lady whom he advised went on to become a really successful investor. Truth be told, it’s hard to fault his principles (putting all issues of its veracity aside), which are in essence, three quick steps to find innovative companies with pricing power and which make products which are well-loved and purchased often by customers. Any investor would be hard-pressed to call these poor investing advice.
In any case, for those wanting to know even more about how to find success in the share market beyond the three quick steps I’ve shared, sign up now for a special FREE report we at The Motley Fool Singapore have prepared titled “10 Steps to Making a Million Dollars in the Market”. Enjoy.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Sarine Technologies and Neo Group.