I think there's a fundamental shift in my research techniques. After immersing myself in investing and all the literature on investments, I came to the realisation that numbers and ratios are not everything. What is? Management!
Imagine out of your classmates in secondary school, you're supposed to pick one whom you think will have the greatest potential to be the most successful. Who do you pick? Do you pick the ones that perennially top the cohort? Do you select those who always play truant and disrupt the class? Do you pick the most talkative ones, or the most quiet ones? The ones with the most activities outside of school work?
I'll pick the ones with the character that I admire. Honesty, integrity, steadfastness, leadership, charisma are some of the characteristics one may look out for. They might not necessary be the smartest in exams nor the least playful. You literally have to bet for the ones that have the most qualities that you admire.
Now, how different is that from an investing point of view?
Investing is not just analysing the statements, the business and the economics. It's not just calculating the PE, liquidity ratios, free cash flow. It's not just forecasting and projecting the earnings forward. You're literally betting on the management to bring the company through in good times and bad times, to trust them to place your monies in worthy projects that gives adequate and safe returns, and to believe in them when they do not distribute dividends not out of their lack of a sense of security but because they can use the retained earnings to give you a better return. You're betting on the management to make decisions for you to run the company you've entrusted them in the best of their abilities, to be honest when they made mistakes and to have the foresight and leadership to propel the company forward. There's no numbers or ratios to determine that. There are no stock screens to determine that.
There's only the intangible human assets (or liabilities) that cannot be put in the balance sheet of the company. If you can't trust the management, you can't trust the statements, you can't trust the business.
It's not easy to see something that cannot be seen. It's both frustrating and futile to think that after analysing the companies quantitatively and it passes your criteria and viola! you have your company to invest in. In every investment, we are betting on the future, not in the past. How to determine the future? Project a straight line from the past records and extrapolate to the future (CAGR)? Using a linear model to predict a non-linear world is an exercise in futility. Rely on earnings model? We can't even predict tomorrow's weather accurately using the most sophisticated models, why talk about complex adaptive reflexive system in a particular company's earnings.
No...no.....the future lies in how the management handles the company in every road bumps that lie ahead. The future of any company is shaped by unknown decisions made by the management. They are the ones who come out with new products. They come up with plans to counteract competition and to consolidate their grounds. Management is everything. Read more...I think there's a fundamental shift in my research techniques. After immersing myself in investing and all the literature on investments, I came to the realisation that numbers and ratios are not everything. What is? Management!
Imagine out of your classmates in secondary school, you're supposed to pick one whom you think will have the greatest potential to be the most successful. Who do you pick? Do you pick the ones that perennially top the cohort? Do you select those who always play truant and disrupt the class? Do you pick the most talkative ones, or the most quiet ones? The ones with the most activities outside of school work?
I'll pick the ones with the character that I admire. Honesty, integrity, steadfastness, leadership, charisma are some of the characteristics one may look out for. They might not necessary be the smartest in exams nor the least playful. You literally have to bet for the ones that have the most qualities that you admire.
Now, how different is that from an investing point of view?
Investing is not just analysing the statements, the business and the economics. It's not just calculating the PE, liquidity ratios, free cash flow. It's not just forecasting and projecting the earnings forward. You're literally betting on the management to bring the company through in good times and bad times, to trust them to place your monies in worthy projects that gives adequate and safe returns, and to believe in them when they do not distribute dividends not out of their lack of a sense of security but because they can use the retained earnings to give you a better return. You're betting on the management to make decisions for you to run the company you've entrusted them in the best of their abilities, to be honest when they made mistakes and to have the foresight and leadership to propel the company forward. There's no numbers or ratios to determine that. There are no stock screens to determine that.
There's only the intangible human assets (or liabilities) that cannot be put in the balance sheet of the company. If you can't trust the management, you can't trust the statements, you can't trust the business.
It's not easy to see something that cannot be seen. It's both frustrating and futile to think that after analysing the companies quantitatively and it passes your criteria and viola! you have your company to invest in. In every investment, we are betting on the future, not in the past. How to determine the future? Project a straight line from the past records and extrapolate to the future (CAGR)? Using a linear model to predict a non-linear world is an exercise in futility. Rely on earnings model? We can't even predict tomorrow's weather accurately using the most sophisticated models, why talk about complex adaptive reflexive system in a particular company's earnings.
No...no.....the future lies in how the management handles the company in every road bumps that lie ahead. The future of any company is shaped by unknown decisions made by the management. They are the ones who come out with new products. They come up with plans to counteract competition and to consolidate their grounds. Management is everything. Read more...
