1 Key Question for All Your Investments

Yesterday, I promised to reveal the one final question to ask ourselves before we commit our hard-earned cash to any investment. Before we get there, let’s do a quick recap.

As a Foolish investor, we may want to focus our energy on companies with a repeatable business that also earns healthy gross margins and net margins. It gets better if the company is able to keep most of the cash flowing through it, which leads to a strong balance sheet.

And now, the key question:

How familiar and interested are you in the business?

On the face of it, the question may appear odd, given the financial rigor that we have gone through to get to this question. Not so, says The Motley Fool’s Chief Executive Officer, Tom Gardner. In the Fool’s own book Rule Breakers, Rule Makers, Tom had the following musings to share:

“How does your interest and familiarity with a corporation improve its chances of excelling? It doesn’t.

This final requirement, rather than being applied to public companies, is applied to you, the investor. Even with the six previous criteria in place, absent of an understanding of what your businesses really do, you open yourself up to subpar returns.

The likelihood that you’ll understand whether the bumps and bruises along the way are minor nicks or life-threatening injuries for your company is very high if you can understand and follow its progress”

The long term investor’s greatest advantage: time

As lifelong students of the investing game, I couldn’t agree more. The greatest advantage of the long term investor – in my opinion – is the judicious accumulation of knowledge that can happen over time.

The historical knowledge gained may provide the conviction for the long term investor to act when the chips are down.

As an example, long-time investors in OSIM International Ltd (SGX: O23) would be familiar with its difficulties in 2006, when the company stumbled into a botched acquisition (US-based Brookstone). Fearless investors back then would have done well, as OSIM managed to recover from its stumbles to post satisfying revenue and net income growth since 2008.

Osim Revenue and Profit

Source: Morningstar

With this historical context, the long term investor may have had the conviction to buy shares of OSIM during its stumble last year which was accompanied with a fall in share price. After falling to a low of $1.64 last year, shares of OSIM have grown by 24% to $2.05 on the back of better reported results.

In the same vein, my fellow Fool Ser Jing also recounted his experience in having the conviction – part of which stems from a study of the company’s history – to hold on to food and beverage outfit Super Group Ltd (SGX: S10) despite its recent problems.

Foolish take away

The hardest part about investing may come from the simplest questions.

All the mathematical rigor we put into our analysis may turn redundant if we lack the human conviction to buy or hold a company when tough times inevitably appear.

With the accumulated knowledge and a superior historical context, the long term Foolish investor may do better over time compared to those who will flee at the first sign of trouble.

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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 owns shares in Super Group and OSIM International