Sunday, November 26, 2006

Porter 5 forces

Michael Porter, elder brother of Harry Potter, wrote and published a book in 1980 called Competitive Strategy that helped frameworked how we should look at an industry and the forces that interact with the various companies in the same industry. Ok, just kidding hor, Michael Porter is a real academic while Harry Potter is a wizard in a bestselling septology i.e. a story with seven episodes!

Well what Mr Porter said was somewhat common sense but they will nevertheless teach it in business school and set 1 exam question on this per semester. Anyways, the canonical Porter's five forces are

1) Existing competitive rivalry between industry players
2) Threat of new market entrants
3) Bargaining power of buyers
4) Power of suppliers
5) Threat of substitute products (including technology change)

An industry leader/formidable player should be able to tackle all the forces with ease. As an example, let's look at the aircraft makers: Airbus and Boeing.

1) Rivalry between these two players: yes they are somewhat bitter rivals, but on the whole, because there are only two players, price competition is quite limited, and profitability remains high.

2) New market entrants? Not likely, since they are the leaders with all the experience, no airline will think of getting planes from new entrants. Well maybe African airlines buying cheap Russian planes, but overall, not a big threat.

3) With over 100 airlines, basically the airlines don't have any bargaining power. Boeing and Airbus set the price, airlines just accept. If they don't there will be 99 airlines waiting to buy anyway.

4) Suppliers, well depending on the parts, suppliers can be quite powderful. Especially high-end stuff like engines etc. Hence they (Boeing and Airbus) may lose out here.

5) Substitute? Er like flying cars? Or high-speed broomsticks? Well sorry this is not Hogwarts, so in short, no threat from substitutes.

So Boeing and Airbus are in a good position, of the 5 forces, they have the upper-hand in 4 of them. Of course, this is just one aspect to look at one industry. Will be introducing more!

See also SWOT analysis
and Secular trends

Tuesday, November 21, 2006

Company cheatsheet and stuff - not to be missed!

According to Philip Fisher, one of Buffett's teachers (besides Ben Graham), you cannot never compile a cheatsheet for a company. You have to constantly sniff out info on the company, keep talking to anybody and everybody, from suppliers to customers to employees etc. So analysing a company probably takes like two gozillion years and Frodo have completed the Mt Doom trip like 15 times.

In our world of MTV and instant gratification. Nobody has time for this crap right? So yours truly here has compiled a the ultimate cheatsheet to look at when you first lay your eyes on a company.

I must stress that this cheatsheet is not exhaustive. There are probably another 1,001 things that you should look at. But it should be a good way to start. Also remember than the time you spent researching a company is inversely proportional to the risk that you will lose money. i.e. more research less risk.

But then again who has time to wait for Frodo to go Mt Doom 15x considering we don't even have time to make babies. So I have also kindly calculate the optimal time to spend research a co.

This would be roughly 30 hrs for beginners and 10 hrs for more lao jiao people. But after analysing, this does not mean that you should buy or sell the stock immediately. You should wait for a good time to enter or exit. Investing needs patience, so watch less MTV.

Anyway, to save you from more bull shit, here's the list.

Company specific factors
Mkt cap greater than S$100mn
Operating Profit greater than S$10mn
OPM greater than 10%
Dividend yield greater than 4%
D/E Ratio less than 1x
Growth greater than 5%
ROE greater than 15%
ROA greater than 5%
(Usually these factors can be put into a screening tool to screen out companies that meet these criterias, but I have not found a free screening tool yet... if anyone can find one, pls inform me ok?)

Qualitative factors
Industry climate and firm's position
Strengths and weaknesses of the firm
Major risks for the firm

PER less than 18x
PBR less than 4x
EV/EBITDA less than 10x
(These can be put into the screening tool as well)

There are a few things to take note. Even if a firm fails to meet 1 or 2 criteria, it doesn't mean that the stock is lousy. If there are good reasons, it is still a buy. If you try to find a stock that meets everything, probably there won't be any. That's why the each criteria is actually not too strict to begin with. Also, qualitative info matters, that's why it pays to read annual reports, research reports and business news.

See also Investment Philosophy
and Investment Process

Sunday, November 12, 2006

Investment Process

An investment process is a SOP (yucks I hate to use this acronym!) that you follow when you want to invest in a stock. For the sake of many non-Singaporean guys and Singaporean gals who have never bother to find out what their boyfriends did in the most unproductive 2.5 yrs of their lives. SOP stands for Standard Operating Procedure: a set of strict execution procedure to follow, during NS.

Anyways, SOP for investing is pretty simple, for me. You should modify your own investment process to suit your style. Investing is as much about your personal style as making money. Your investment process should help to drive your investment philosophy. The process I follow is summarized below

1) Screening
2) Fundamental analysis
3) Valuation
4) Technical
5) Monitor

Screening is the most tedious part of the whole process. Usually it takes a long time to come up with stock ideas if you do not have the relevant tools. Professional fund managers use screening tools to "screen" stocks that fulfill certain criteria. This would be like low PER, high earnings growth, high ROE etc.

Fundamental analysis is what a main part of this blog has been talking about. Things like financial statements analysis, financial ratios, SWOT analysis, intrinsic value etc. The company that you want to invest in must first pass the screening, and then you look in-depth into the company. This is the part when you see the company under the microscope. Scrutinize everything.

If everything looks ok up till now, look at valuations from all angles, PER, PBR, EV/EBITDA etc. A good company must be cheap. If it is expensive, there is no value to be gained by buying. See this post.

Technicals: buy when the timing is right. The general market is on a positive trend, but not too bullish. No analysts are looking to downgrade the stock. i.e. most of them have SELL or NEUTRAL ratings. Charts look ok. Overall sentiment is good but not overly optimistic. Of course, true value investors do not look at this because over time, prices correct themselves and move towards its intrinsic value. But a stock can still drop 10% 2 days after you bought them. If you don't like to stomach this kind of shock, better take a look at technicals.

And finally, when you have bought a stock. Monitor it. Not by looking at its daily price. But by looking at its business. Make sure they are making money, doing the right thing. If things are not going as expected. Sell.

Investing in a stock should be viewed very much like buying an house or a car. The more homework you do, the less likely get conned or lose money.

See also Financial Ratios
and Brokers cannot be trusted

Sunday, November 05, 2006

Secular trends

Secular trend is one phrase that makes monkeys on Wall Street salivate profusely. It is as if they see bananas coming to them in tsunami waves or something. Well actually, investors probably also imagine tsunamis of dividends pouring over them and that's why they scramble to ride these trends at all cost.

Our world is defined by huge trends or secular trends that last for some time, usually 5-10 years. In the 60s and 70s we have autocars, 80s we have Japan Inc, and the beginning of the 20yr US bull market. 90s was IT and Tech, Media, Telecoms (Ouch!), and now China and commodities.

Note: more often than not, the trend goes into bubble mode and the Greater Fool Game begins. It it important to know the difference and decide for yourself if participating in the Greater Fool Game is what you want.

Betting on these trends will reap you rewards far bigger than day-trading or any other money-making scheme you can ever think of, including building 2 x Integrated Resort to attract oil money, Chinaman yuan, high rollers' money and dunno what else.

Ok, perhaps the reward is not as big as being faithful and good to your spouse. Real life example: University Don flirting with China Gal. Umm, there are other ways to bet on China okay, and they don't need $7k per mth.

Anyways, identifying such trends require good grasp of global condition and some innovative thinking. This I would say 99.99% of the brokers and their analysts lack. For a good reason. If you identify a trend, you need not buy and sell all the time. Just ride with trend until the cows come home. And this is not good for the brokerage business.

So what are the trends going forward? By right, you should go think for yourself, but since I am writing this, and you are reading fervently, I guess I am obliged to share. Most of these are not new, so pls don't say I have no orginality or what.

1) Silver market: The world is aging rapidly as the baby boomers retire, cash in their pension money or CPF, they will need to find ways to spend it. In most other countries, they spend in on travel, buying houses, cars, buying LCD TVs etc. Hence the global boom in real estate, LCD TVs and autos. But sadly in Singapore, our baby boomers spend it on? *Drumrolls* China Gal! So Buy Prada.

The stock, not the bag.

2) China consumer market: Let's face it, The 21st century belongs to China. We have probably only been through 1/3 of the big China story. So far they simply built 10,000 factories and produced enough stuff to drown Mordor's army 2 times. The Chinese consumers haven't even started spending yet. When they do, it will be interesting.

Again buy Prada. Okay enough of Prada, buy Ferragamo.

If you think about it, in the past 5 yrs, every big secular trend was actually due to China. Why did commodities go up? Why did steel prices tripled? Why did oil price shoot through the roof? Why can Walmart conquer the world with its cheap stuff? China. China. China.

Why is Singapore building 2 x Integrated Resort? To create more jobs for China gals and get more University Dons to spend $7k on China Gals. In short, China again.

Although the whole world has been talking about China for the past 10 yrs, we are probably not finished yet. China is probably Singapore in the early 80s. We have more to go.

Of course, there will be other secular trends. They will be up to us to find out. It will probably be difficult. You need probably 10 mental workout per week, and talk to 20 think-tank people regularly. But when you do, pls update this blog.

See also Good stock but not a good buy
and Mr Market