The Successful Investor’s Checklist – Part 1

Stepping into the share market can be as daunting as walking up to the longest buffet spread you have ever seen. The number of companies listed in Singapore is fast approaching 800. Needless to say, it would be tough for any Foolish investor to study all companies in great detail.

Narrowing it down to a few

To narrow down this long list of companies, Pat Dorsey, author of the Five Rules for Successful Stock Investing, offered up a 10 minute test in his book to separate the companies which are worth a detailed examination from the ones which aren’t.

Do note that the criteria in the test are to be treated as rules of thumb, as there will be exceptions to each guideline. That said, Dorsey believes that these guidelines may eliminate poor investments more often than not.

So, let’s get started.

1. The minimum quality hurdle

The first lot of companies to go would be those with miniscule market capitalizations as well as those which do not file regular financial updates. It stands to reason that if you are not able to easily access public information about a company, it may not be worth your time.

Recent initial public offerings (IPO) also do not interest Dorsey as he feels that newly-listed companies are likely to have short track records. This is not to say that recent IPOs, such as financial products distributor iFast Corporation Ltd (SGX: AIY), which got listed only back in December last year, are definitely not worth your time. After all, iFast’s platform has been around since 2000 and may prove to be a viable business model.

2. Presence of operating profit

Although this test seems simple, Dorsey thinks that it can keep you from a lot of trouble. He simply prefers companies that have proven that it can earn a buck.

At the local front, this means that we might want to skip companies such as fish products supplier Pacific Andes Resources Development Ltd (SGX: P11); the firm has generated negative operating profit on a trailing twelve months basis. Instead, we might want to focus our attention on companies with long track records of earning a positive operating profit. One firm with such a history is engineering outfit Boustead Singapore Limited (SGX: F9D). You can start your research on the company here.

3. Consistent cashflow from operations

The third criterion would involve something that is close to Foolish investing hearts. Dorsey prefers to see consistent cashflow from operations as that can help fund future growth for the company. Without consistent cashflow from operations, a company may be forced to seek additional funding in the future or dilute its shares.

For this criterion, pan Asian retailer Dairy Farm International Holdings Ltd (SGX: D01) may fit the bill. Dairy Farm has generated positive cashflow from operations since at least 2003 – partly as a result of that, the firm has been able to grow its store count over the years while reducing its debt. Read more about Dairy Farm here.

Remember: All these criteria can only help you narrow down the field as more research should be done beyond this. Like what you see so far? Click here to read Part 2.

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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.