Time to Stand on My Own Feet

two-feet
Recently, I have decided to be more selective of the type of investing events I attend, after participating in a recent summit which I found to be not worth the time and money. I am starting to find such events repetitive and simplistic, with a heavy dose of promoting one’s own resources in a strong marketing strategy. One of the reasons why I attended was to find out whether the speakers had any stock tips for the current year, something I believe most who went wanted as well. In retrospect, I realise that it is a very lazy form of thinking on my part, and makes me no different from those who go from one hot tip to another without doing my own due diligence. Nevertheless, events like these may still be beneficial for those who have just started out investing.

In the last two years, I have been reading the blogs and articles of many well-known investing bloggers, and have invested in the same stocks as them at certain times, only to cut my losses when the stock moved down heavily. It was only last year that I realised that what works for one may not work for another, as the temperament of each individual investor is different. As such, I embarked on my own journey at self discovery, and started to pick stocks on my own after doing my own research. I feel that it is time for me to step out of my comfort zone fully this year, and listen more to my own observation and judgement. I remain grateful to those who have aided me in my investing journey so far, as I believe that every article, book, or event attended played a part in my learning. I will still continue to seek out good learning opportunities, as it is a lifelong process, but I hope to refrain from the venomous habit of hunting for hot tips in the market.

 

“You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.” – Warren Buffet

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Why Qualitative Analysis is Important

Whats the story
When evaluating a stock, one has to consider both qualitative and quantitative factors. The qualitative factors tend to be regarding the business model of the company, its risks and opportunities as well as the quality of its products. As such, it can be really subjective. In this regard, I find the quantitative factors quicker and easier to analyze as figures do not lie (unless they are being manipulated, which in this case qualitative factors like the quality of its management would come into play). However, it is important not to be blinded by numbers alone, as numbers on its own do not tell the whole story.

When I was starting out, I used alot of financial metrics like ROA, ROE, debt to equity, increasing trend of sales and earnings, etc. to filter stocks. These churned out a number of companies of which many turned out to be solid businesses. Convicted by many of their financials, I paid less attention to the qualitative side. This proved to be a costly mistake. Some which I have personally invested in are China Minzhong, Food Empire and Challenger Technologies. All three companies had strong financials, growth, and a sturdy balance sheet. However, I did not understand the risks of each investment completely. In China Minzhong, I did not understand the industry, its competitors, and the quality of its goods. For Food Empire, I did not comprehend fully the currency and country risks of the business itself. Its two main markets were Russia and Ukraine, and as such, the performance of the business could be affected by political situations, along with economic problems. We have seen how the Russian rouble depreciated massively against the USD this year due to political issues and the tanking of oil prices, which brought turmoil to the oil industry – a major contributor to Russia’s economy. As for Challenger Technologies, I was able to pay visits to its stores, and get a first hand feel of its business and products, but I did not fully apprehend the risk of online retail. Granted, all three may still be great businesses to some, and better investments to others, but the point I would like to highlight would be that qualitative analysis is crucial in any investment.

In 2014, we have seen how companies with fantastic financials perform badly, for eg. Biosensors International, Cordlife Group. I had been keeping up with these two companies for their strong financials but I was not able to understand their business model from a qualitative standpoint. I had no experience with the medical industry, and thus it was not in my circle of competence to analyze Biosensors. As for Cordlife, I have had exposure to its products but could not understand the complexity of their investments and holdings in other associates. Moreover, their deal with CCBC was confusing to me. It is important to understand what one is getting into, and if things seem too hard to understand, it might just be better to stay away.

Saying ‘no’ to an investment when you are unsure of it qualitatively is an important thing we all need to practise if we are to get better at investing. In essence, always ask yourself – “What’s the story?” behind this investment before pulling the trigger.