Thursday, August 22, 2013

Choose Stocks Like You Would Choose Friends

I attended a wonderful class gathering a few weeks ago. It was our 20th year since graduation. Gosh, time flies (and I am revealing too much about my age here :). We were teenagers then and now mums and dads. In a few years, our kids would be teenagers themselves. How would we advise them how to choose their friends? How did we ourselves end up with good friends?

Well, a lot was actually just fate. We were classmates. We didn't really get to choose. Even if we could, we were young and innocent teenagers then. We wouldn't really pull out a checklist and choose whom we should or should not be friends. We just clicked and here we are, after 20 years, sharing life moments and having fun. But it is also true that we gravitate towards people that we like and enjoy their company. Some of us are closer to secondary school friends, others in JC and some others have good friends from the army or university days. So we somehow, unknowing, do "choose" our friends.

Life, in my opinion, provides a lot of lessons for investing and our attitude towards investing is also a reflection of our way of life. So how should we choose our stocks? Can we learn from how we choose friends? If I think about a quick template for "choosing" friends it would be as follows:

1. Character
2. Trust
3. Long Term

Character: Birds of a feather flock together. We hang around with people that are not very different from ourselves. So non-smokers usually have few friends who smoke. People who value similar qualities will find people who think like them. Of course, it doesn't have to be a 100% match. We can be different enough yet we find it enjoyable to hang out together. Someone who values integrity, humility, tenacity (I really like all these "ty"s) will seek friends with similar values and character.

In investing, I believe similar principles hold. You want to find stocks that fit your temperament. If you like excitement, maybe Tesla, Facebook or Hyflux are stocks that appeal to you. You can still apply value philosophy, buy them at the right price (ie when price is way below intrinsic value) and make money. For me, I would prefer the Colgates and Heinekens of the world. Slow and steady winners with strong branding. Value investing can work for different stocks. But you have to find the right stocks for yourself.

Trust: Of course, friendship is also about mutual trust, respect and helping one another. Some of these once broken can never be repaired. Investing is a bit like that sometimes. There are times when you actually disappoint a stock by selling too early, or by not buying and you never get a chance to own it again, Ever! I speak from experience and this can really be painful. Especially seeing these stocks go from strength to strength after you sold, way too early! Or get taken out at 50% premium like F&N, after you missed buying it bcos it rallied 20% and you refused to pay up and buy. Ouch! Then, there are times the stock disappoints and you sell it the first chance you get. But good friends like good stocks can be life long relationships. It's a commitment.

Long Term: Some people might prefer hi-bye friends all their lives. But for most of us, I would believe we want to stick around our friends. Investment is the same. Invest with a long term mindset. A good stock is really like your best buddy or your sworn sister. Of course this analogy has its limit. You can't really be there or be a shoulder to cry on for a stock. But like a good friend who will help you whenever you need help, a good stock just will pay you dividends whenever the payable date comes. It will also grow as you grow. And when you have time to learn more about it (ie the company and its business, as owning a stock is simply owning a small part of the company), you also learn more about yourself.

Investing is a process of discovering: who you are, what you’re interested in, what you’re good at, what you love to do, then magnifying that until you gain a sizable edge over all the other people. I really like this quote. This quote comes from Li Lu, a famed value investor who introduced Chinese companies to Warren Buffett. I would add that good stocks, like good friends, help you tremendously in that process of self discovery.
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