A Losing Technique To Avoid

I went for some Peranakan food the other day. If you have never tried it, I do recommend it highly.

Unfortunately for me, what I know about Peranakan food can be written on the back of a postage stamp. And a very small stamp, at that.

Admittedly, I have sampled the delicious Straits cuisine before. But I have always been a dinner guest rather than someone put in charge of the menu.

Glazing over

So, when I looked down at the list of food options on offer, my eyes glazed over. I could pronounce each item on the menu, perfectly. But I had absolutely no idea what they were.

Help was, however, on hand.

The waiting staff had the patience of Job. They explained some of the more interesting items and which ones were the chef’s specialities.

Thanks also go out to Agnes who was sitting at the next table. Agnes is a Take Stock reader, who immediately recognised that I was well out of my depth, and came to my aid.

700 stocks

Isn’t investing a bit like that too?

With over 700 stocks listed on the Singapore market, how do we decide which ones to buy?

Is it simply a case of picking a dozen or so shares, shutting our eyes, and hoping for the best? Some people might be a little guilty of that.

Peter Lynch once said: “People should spend as much time selecting stocks as they do when buying a refrigerator.”

That is a frightening observation by one of the best investors of our time. But he’s right.

What does it do?

When we buy a stock, we should try to understand as much as possible about the company. Behind every ticker is business. So find out what it is does.

The next part is the quite hard too – but not nearly as hard as the final part.

We should write down in one short sentence what the company does. That can be a lot harder than you think.

But if you can’t distil into just a few words what a company does, and why it should even exist, then you are going to find the next part even tougher.

With every business there should be a story that you can easily follow.

Follow me

In the case of a Real Estate Investment Trusts, such as SPH REIT (SGX: SK6U), it could be footfalls in a shopping mall. With a hotel such as Mandarin Oriental (SGX: M04), it could be the average revenue it earns from its rooms.

With an airline, such as Singapore Airlines (SGX: C6L), it could be the loading factor. With a retailer or a grocer, such as Sheng Siong (SGX: OV8),  it could be the revenues that it generates from stores now compared to a year ago.

The story should be the focus of our attention, if we decide to invest in the company.

So find a story line to follow, as a way of separating the many companies in the stock market.

If you study ten companies, you might find one that has a good story. If you look at 100 companies, you might find ten.

It is quite a painstaking process. But one that can produce rewarding results, if you do it properly.

Weekend retreat

Here at Motley Fool Singapore, we spend our time looking at companies for story lines to follow too. It is something that we do, day in, day out… and sometimes over the weekends.

But here is one thing that we don’t do. We never stop monitoring the story. We never become so attached to a winner that we let complacency set in.

Complacency is probably one of the biggest mistakes that any investor can make.

It is also important to remind ourselves to never confuse a stock price with the story. Doing so, is probably the second biggest mistake that we can make.

A losing technique

We should also never allow our hearts to rule our heads.

Many investors are tempted to sell a stock just because it seems to be slightly over-priced. That is a losing technique.

Some investors sell, simply because they have made a profit. That, for me, is just as bad.

So go through the stocks in your portfolio today. Write down briefly what each company does. And look for a story that you can follow behind each stock.

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.