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How To Pick A Grand-Slam Stock

Congratulations to Serena Williams and Novak Djokovic on their Grand Slam victories in South London. As an amateur tennis player, I have always looked forward to the Wimbledon fortnight.

By “amateur” I am not just referring to the fact that I don’t (and can’t) make a living from tennis. I would probably die of starvation, if I had to. Instead it is a painful admission that I border on being hopeless at the sport.

But that hasn’t stopped me from watching the experts play. There is something quite spellbinding about the way that professional tennis players always seem to have so much time to hit the ball.

The puck stops here

The secret, I have learnt, is anticipation.

At the risk of mixing sporting analogies, Canadian ice-hockey star, Wayne “The Great One” Gretzky, once said: “I skate to where the puck is going to be, not where it has been.

There is an uncanny similarity between tennis, ice-hockey and stock-market investing. If we want to be successful, we have to anticipate where a stock is going to be some time in the future, not where it is now or where it has been.

Warren Buffett said as much when he pointed out that: “Investment is an activity of forecasting the yield on assets over the life of the asset”.

When we invest, we should be looking at how much a stock is capable of delivering in earnings and dividends over the next five, ten or twenty or more years – not where it is today or where it was yesterday.

Twenty-twenty foresight

Investors who had the foresight two decades ago to back Oversea-Chinese Banking Corporation (SGX: O39), food producer Super Group (SGX: S10) and conglomerate Jardine Matheson (SGX: J36) could have been amply rewarded.

The three companies have delivered total returns of 459%, 618% and 1,400%, respectively since 1995.

But Wayne Gretzky’s “puck” advice is only right up to a point, though.

While investing is about estimating where a stock could be some time in the future, it is also about positioning ourselves to cover many possible outcomes.

Good players, for instance, will consider a range of possibilities, rather than running to a single point where they think one particular stock is going to be. In other words, they diversify by building a portfolio of shares.

But being too diversified is not a good idea, either.

Warren Buffett said: “Diversification is protection against ignorance – it makes little sense for those who know what they’re doing”.

Bet big

He went on to say: “We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to its attractiveness, we believe in buying worthwhile amounts.

Peter Lynch said something very similar: “When favourable cards turn up, add to your bet, and vice versa.

And that is one of the secrets to really successful investing. Don’t gamble. Don’t ever gamble, but watch for unusual circumstances, which can come along more regularly than you might think, as recent events in Shanghai and Shenzhen have shown.

When a stock price falls below its intrinsic value, then that could be an excellent investment opportunity.

So, stick to your principles, think differently and use some foresight. You might just be where the puck is going, if you get your research right.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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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 Director David Kuo doesn’t own shares in any companies mentioned.