There was an amusing cartoon in the Straits Times recently. It wasn’t guffawingly funny. But enough to raise a wry smile…. ….A mother asked her young son why he was carrying a bundle of sticks through the house. The young lad replied that dad would pay him five cents for every stick he picked up from the backyard…. …But mother quipped that those sticks were from the front yard. “Not anymore!” replied the boy. And in the final clip, a thought bubble appears above the mother’s head that read: “An entrepreneur is born”. Dark and murky If we replace the…
There was an amusing cartoon in the Straits Times recently. It wasn’t guffawingly funny. But enough to raise a wry smile….
….A mother asked her young son why he was carrying a bundle of sticks through the house. The young lad replied that dad would pay him five cents for every stick he picked up from the backyard….
…But mother quipped that those sticks were from the front yard.
“Not anymore!” replied the boy.
And in the final clip, a thought bubble appears above the mother’s head that read: “An entrepreneur is born“.
Dark and murky
If we replace the letter “i” with the alphabet “o” in the word “stick”, we will have summed up the dark and murky business model of sell-side analysts in a simple three-slide cartoon.
Brokers regularly move stocks from the front yard to the back yard, and back again. They will lower stocks from a “buy” recommendation to a “sell” and back again to a “buy”, simply to drum up trading activity.
And every time we follow their advice, we, just like the father in the cartoon, are unwittingly paying money for old rope.
Some fund managers do something similar, though their actions tend to be less transparent. They buy and sell shares regularly to justify their existence. That inevitably incurs fees, which, if we are unit holders, pay through unnecessary charges.
Some might call it tactical asset allocation. Others could call it strategic asset allocation. But in effect it is hapless investors who are paying the price through needless allocation.
Every dollar that we fork out through mindless switching will inevitably eat into our total returns from investing.
Warren Buffett once said that we should buy so well that we should never need to sell. He is right.
We should really be spending time looking for wonderful companies that we can buy at good prices. After that we should aim to hold them for the long term.
It is through regular compounding of the dividends that we can reap the benefits from investing. Put another way, it is time that we spend in the market rather than trying to time the market that counts.
Wonderful companies come in all shapes and sizes. But they often share some common characteristics.
Warren Buffett said he would never invest in a company that had difficulty raising prices. So, pricing power is something that we should aim to look for in a business.
For instance, Hongkong Land (SGX: H78), in my opinion, has pricing power. Despite astronomical rental costs in Hong Kong, the property developer is able to achieve almost full occupancy in the country’s Central Business District.
Another important trait of a wonderful company is a high return on equity. It measures the amount of profit that a company is able to generate on every dollar invested in the business.
These are just two of the many characteristics that the Singapore Stock Advisor team looks for when we investigate companies to recommend to our subscribers.
As you can imagine, not every company makes the cut. We are quite picky about the companies that we recommend. That’s because we recommend companies for the long term.
What’s more, not all our recommendations will shoot up in price, immediately. But that’s ok. It is not the point behind investing….
….Instead, we are looking at the whether the stock will generate a decent return over its lifetime.
What we do is not beyond anybody else’s competence. So let me show you what we do. To find out more, just click here.
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.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended Hongkong Land. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.