The 1 Important Thing that’s Needed for Successful Investing

Yesterday, I read with interest my colleague Chin Hui Leong’s article on his biggest discovery about value investing. As I was going through it, I was reminded of an old article I had read about written by The Oracle of Omaha, Warren Buffett. The article’s titled “The Superinvestors of Graham-and-Doddsville.”

Many different roads can lead to Rome

Buffett’s article talked about how various money managers, such as Walter J. Schloss, William J. Ruane, Charles Munger, and Buffett himself, had been very successful investors, despite having differing investment styles.

Buffett recalled in the article:

“They have gone to different places and bought and sold different stocks and companies, yet they have a combined record that simply cannot be explained by random chance”.

Similarly, Chin wrote in his article:

“As I read through the interviews, I started to notice contradictions between each investing master. In some cases, two investing masters would be doing things in a completely opposite manner.”

In spite of their varied approaches, the investing legends concerned have amassed spectacular returns over many years. How is that so?

That’s because all the great investment managers understood one thing: Behind every stock ticker symbol lies a business. Benjamin Graham, the father of value investing, once said that investment is most prudent when it is most business-like. Approaching investing from a business-perspective means we’re not looking at shares as mere ticker symbols. Rather, we’re looking at shares as businesses which provide a particular service or product.

A tale of two approaches

Let’s take a look at Asiasons Capital Limited (SGX: 5ET), Blumont Group Ltd (SGX: A33), and LionGold Corp Ltd (SGX: A78) as an example of the wrong approach. The trio became infamous last October when they collapsed spectacularly in price by more than 90% or more in a matter of days. But before their collapse, they had also been rising very quickly and attained ridiculous valuations near their peaks, as illustrated by my colleague Ser Jing:

“…Blumont was at six cents on Aug 2012, and had hit a high of S$2.45 (an increase of 3980%) barely a year later on 30 Sep 2013; Asiasons’ price grew 197% in just nineteen days from 1 Sep 2013 to 19 Sep 2013; LionGold had increased in value by 50% from 1 Aug 2013 to 27 Aug 2013.

…Blumont was selling for 500 times its trailing earnings and 60 times its book value at some point prior to its collapse; Asiasons carried a price-earnings ratio of 583 before last Friday’s [4 October 2013] shellacking; as a company, LionGold did not even have any profits to speak of for its last 12 months and yet carried a market value of S$1.42b on last Thursday [3 October 2013].”

It seemed to me that market participants were simply pumping up  share prices of the trio without any regards for their business fundamentals. Those who were part of the frenzy likely had viewed those shares as mere pieces of paper to be auctioned at the stock exchange.

Meanwhile, there have been shares which had delivered returns of 1,000% or more over 10 years because their earnings (and by extension their business value) had grown consistently and considerably over the years. These shares could be examples of taking a business-like approach to investing.

Foolish Bottom Line

When investing is approached from a mindset of that of a business owner, the rest of the important aspects of investing – such as looking at the moat, management, quantitative aspects, and valuation of a business – will also be looked at from a business owner’s perspective. When the mindset is right, the rest of the puzzle will fall into place much easily.

Just like Hui Leong’s article, Buffett also showed that there are many roads which lead to successful value investing. We just have to approach investing from the right perspective. We should always be mindful of that one important thing: Behind every ticker symbol, there is a business which ticks.

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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 Sudhan P doesn’t own shares in any companies mentioned.