April Fool’s Day Takeaway

April Fool’s Day may be over now, but it leaves behind some lessons.  One lesson was captured in the form of a tweet seen below:

The tweet sounds amusing but it also makes an important point. In our current age of boundless information, the problem for investors is rarely about the lack of information. Rather, our challenge is to figure out information that will be useful for our investing process.

Drinking from the firehose   

Investors today are blessed with information – all you need is a few clicks on a mouse or a few taps on a mobile device. But, not all information is worth considering.

For instance, the financial media tends to be filled with predictions on where the stock market is headed next, or where oil prices will be trading next, or where <name your own financial instrument> will end up next. It is not a stretch to say that predictions like these are rarely useful to investors.

Instead, investors may want to spend their time looking at important things such as a company’s industry dynamics, how much cash a company has on its balance sheet, the amount of free cash flow that a company is able to generate, and much more. 

Looking behind the curtain

Looking underneath the hood of a stock helps us understand the underlying business. For instance, a company like Sheng Siong Group Ltd (SGX: OV8) is able to collect cash from its customers (the common consumer) long before it pays its suppliers. This keeps its cash flow abundant.

Keppel Corporation Limited (SGX: BN4) on the other hand, has a different relationship with its customers and suppliers. As a builder of oil rigs, Keppel Corp takes on big projects which may take years to complete. Subsequently, the company is paid in stages by its customers but these payments may not cover all running costs. This would mean that Keppel Corp has to fork out some of its own money to keep the projects going until the customer pays up fully.

Final points

Unfortunately, some stock market participants prefer to trade based on random stock tips. They buy and sell stocks without looking at the underlying business. In doing so, these stock market participants are not investing, but are speculating on share price movements.

This behaviour may not be much different from buying a lottery and hoping for the best.

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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.