Not All Great Investments Are The Right Investments For You

When I first started investing, I eagerly attend all type of investment seminars or luncheon by banks, in the hope of finding as many great investment ideas as possible.

However, after experimenting with investing for a few years, I realised that we should not really buy shares in just any company, even if they turn out to be a great investment in the future. Here’s why.

The most important thing is to be able to sleep soundly at night

When we invest in a company, we have to be comfortable with the decision. If we are not, we might end up feeling uneasy every time there are new developments at the company.

For example, you might read a positive report on Raffles Medical Group Ltd (SGX: R01). The stock has done remarkably well, appreciating more than 1,000% times since 1997. However, you might feel that even though Raffles Medical Group is a great company, you are unsure of the current valuation, at more than 36 times price to earnings ratio. If you force yourself to invest in the company, you might find yourself losing sleep over it, worrying whether the company will be able to meet it next quarter’s earnings target.

The company might indeed continue to do well for shareholder in the future. Yet, it will not be the right investment for you, if you cannot get past the fact that you have to pay 36 times earnings to invest in the company.

How does the company make money again?

It is also important that we invest in companies that we understand.

Knowing how the company actually makes money is one of the key factors in avoid investing mistakes. For example, Jardine Matheson Holdings Limited (SGX: J36) is a conglomerate with interests in many different businesses. The company has a huge engineering and construction business. It is in the transport sector, the restaurants business and even the IT industry. It has a financial arm with insurance and brokering of insurance through its investment in Jardine Lloyd Thompson.

Jardine Matheson also has exposure to the property, retailing, hospitality, automotive, plantation and even mining industry. With so many different moving parts, it is definitely not a simple company to understand.

Still, the company has performed very well over the long term, seeing its share price increase from about US$16.00 per share to the current US$53.69 per share, more than tripled since 2005. Again, it was a great investment but it might not be right for you.

The Singapore market alone has more than 700 listed companies. A typical well-diversified portfolio requires no more than 30 investments. Therefore, we can be selective when it comes to choosing which companies to invest in. Remember, we not only have to find a good investment, finding the right investment for us is even more vital.

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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 writer Stanley Lim does not own any companies mentioned above.