6 Quick Lessons to Set Yourself Up for Investing Success – Part 1

On occasion, Foolish folks like us will attend interesting talks on investing. One such talk was given by Professor Aswath Damodaran at the SIM Investment & Networking Club Youth Financial Symposium last Wednesday. The travelling professor hails from the Stern School of Business in NYU and is a well-regarded voice on the subject of valuation, corporate finance, and investment management. He posts regularly on his blog here.

There were plenty of noteworthy quotes and pieces of wisdom shared during the session, and I’d like to summarize it the best I can. Below are six quick lessons which I gleaned from the two hour session: 

Setting yourself up for success

After his session, Professor Damodaran opened the floor for questions from the audience. With the recent fall in the Russian currency fresh in mind, one of the questions was about valuing companies located in Russia. In this case, Professor Damodaran’s answer was swift: He felt that if political conditions in a country were unpredictable – such as Russia’s – he would quickly give it a pass.

Therein, lies an important lesson.

In his opinion, the act of valuing shares is not about being a spreadsheet ninja and being adept in plugging-in numbers and figures. Like any tool in a toolbox, we should find the right companies to start with before proceeding with the valuation of its shares.

Speaking of Russia, there are companies listed in Singapore with significant operations in the troubled country, like food and beverage manufacturer Food Empire Holdings Limited (SGX: F03). Following the professor’s advice, if we find Food Empire’s business future to be too hard to imagine, then we might be better off just tossing it into the “too hard” pile.

Separate the signal from the noise

Here at the Fool, we are fans of tuning out the noise from the financial media. In the session, Professor Damodaran shared one of his experiences while preparing a valuation report for a company. The annual report for the company in question had a good 250 pages to it, but the number of pages he used was a grand total of 12.

So, what about the rest of the 238 pages?

It is likely to be a whole lot of noise, in our Foolish opinion. As my fellow Fool Ser Jing once pointed out, not all information will be useful for our investing thesis for a company.

For instance, retail sales reports in Singapore can be deemed less important for a company like BreakTalk Group Limited (SGX: 5DA) as almost half of the company’s 2013 sales came from outside of Singapore.

Don’t bring a hammer to a surgery

In an expansion to the first lesson above, we should also choose the right valuation tools for the company that we are attempting to value. To borrow an insightful and humorous phrase from Professor Damodaran, forcing a valuation technique onto a company would be like bringing a hammer to perform surgery.

In this case, my Foolish colleague Stanley concurs with the professor. He contended that popular valuation techniques such as a discounted cash flow (DCF) model may not be suitable for distressed companies such as Neptune Orient Lines Ltd. (SGX: N03). The shipping firm’s profits have been under pressure for a good number of years, and it would be hard to predict future cash flows of the company in this case.

I hope you’ve enjoyed reading so far. Hang around for part two of this series. 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.