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I realize that so much emphasis has been placed on the choices that one has made in relation to companies that one had bought, that almost no one mentioned about those that one had correctly avoided ! I guess I could not think of a more appropriate title, hence "avoiding the duds" sounded reasonable enough. The same logic applies to mistakes as we can classify them according to "omission" and "commission". Commission means purchasing a company which is a dud and later makes you lose tons of money; while omission means NOT purchasing a company which later turns out to be a star, thus it is mainly opportunity costs.
If we turn the tables around, the same logic also applies. If one consistently avoids buying the "dud" or "over-hyped" companies, one can indeed prevent a substantial loss of wealth. Remember that preserving capital is also one good way of building wealth, as Warren Buffett advises us to "Never Lose Money". Even though cynical readers may point out that I have "lost money" due to this bear market and sharp recession, my argument is that over the long-term, I am confident of adhering to the mantra of "not losing money". This is because I feel that aside from choosing the right companies to take a stake in, it is also important to spot the danger signs for dud companies which may later implode.
Just to give some examples of the companies which I had considered but rejected, they fall into a few broad categories. One of them is "wrong business model", which is what happens when I first review a company's basic business model and decide that it cannot possibly sustain a competitive edge. Either that or the business model seems flawed, risky or inherently unsound. One of the more recent cases which comes to mind is the company GEMS TV, which was listed a few years back. This is a company which sells gemstones through television (akin to TV Marketing) and they had penetrated the UK and USA market. Back after its IPO, it was trading at around $1.50 and analysts were fervently touting for target prices as high as $3 (yes, you heard me right - I still have that report !). By studying the underlying business model, I decided that buying jewellery is a personal process and most people would rather go down to stores to try them out. Moreover, advertising is an expensive business and would require huge upfront capex with limited chances of success (it's a retail operation, not a contract-based business). Hence my decision to avoid the company even though analysts were bullish then. The benefit of omission has saved me a ton of money as the company has gone on to announce 4 consecutive quarters of losses and is now trading at 3 cents per share. It remains to be seen if the company can pick itself back up to its glory days when it IPO-ed.
Another category of companies which I will avoid are those with razor-thin margins. Some industries are effectively commoditized like semi-conductors and PCB Boards so the margin is extremely thin (close to 2-3% or maybe less). This means that a small escalation of costs from suppliers would trickle down into an avalanche for the company, who may have problems raising prices due to lack of pricing power. Some examples would include Chartered Semiconductor (which recently did a rights issue) and Jurong Technologies. The former has seen massive losses due to the plunge in worldwide chip demand while Jurong Tech has been suspended pending the outcome of judicial management proceedings as it was served statutory demands from several banks. Other companies which I have noticed with very think margins are Surface Mount Tech and also Olam* (surprisingly, this "blue chip" has margins of about 0.5-1% only). Read more...[caption id="attachment_2134" align="alignright" width="216" caption="Photo by box of lettuce"][/caption]
I realize that so much emphasis has been placed on the choices that one has made in relation to companies that one had bought, that almost no one mentioned about those that one had correctly avoided ! I guess I could not think of a more appropriate title, hence "avoiding the duds" sounded reasonable enough. The same logic applies to mistakes as we can classify them according to "omission" and "commission". Commission means purchasing a company which is a dud and later makes you lose tons of money; while omission means NOT purchasing a company which later turns out to be a star, thus it is mainly opportunity costs.
If we turn the tables around, the same logic also applies. If one consistently avoids buying the "dud" or "over-hyped" companies, one can indeed prevent a substantial loss of wealth. Remember that preserving capital is also one good way of building wealth, as Warren Buffett advises us to "Never Lose Money". Even though cynical readers may point out that I have "lost money" due to this bear market and sharp recession, my argument is that over the long-term, I am confident of adhering to the mantra of "not losing money". This is because I feel that aside from choosing the right companies to take a stake in, it is also important to spot the danger signs for dud companies which may later implode.
Just to give some examples of the companies which I had considered but rejected, they fall into a few broad categories. One of them is "wrong business model", which is what happens when I first review a company's basic business model and decide that it cannot possibly sustain a competitive edge. Either that or the business model seems flawed, risky or inherently unsound. One of the more recent cases which comes to mind is the company GEMS TV, which was listed a few years back. This is a company which sells gemstones through television (akin to TV Marketing) and they had penetrated the UK and USA market. Back after its IPO, it was trading at around $1.50 and analysts were fervently touting for target prices as high as $3 (yes, you heard me right - I still have that report !). By studying the underlying business model, I decided that buying jewellery is a personal process and most people would rather go down to stores to try them out. Moreover, advertising is an expensive business and would require huge upfront capex with limited chances of success (it's a retail operation, not a contract-based business). Hence my decision to avoid the company even though analysts were bullish then. The benefit of omission has saved me a ton of money as the company has gone on to announce 4 consecutive quarters of losses and is now trading at 3 cents per share. It remains to be seen if the company can pick itself back up to its glory days when it IPO-ed.
Another category of companies which I will avoid are those with razor-thin margins. Some industries are effectively commoditized like semi-conductors and PCB Boards so the margin is extremely thin (close to 2-3% or maybe less). This means that a small escalation of costs from suppliers would trickle down into an avalanche for the company, who may have problems raising prices due to lack of pricing power. Some examples would include Chartered Semiconductor (which recently did a rights issue) and Jurong Technologies. The former has seen massive losses due to the plunge in worldwide chip demand while Jurong Tech has been suspended pending the outcome of judicial management proceedings as it was served statutory demands from several banks. Other companies which I have noticed with very think margins are Surface Mount Tech and also Olam* (surprisingly, this "blue chip" has margins of about 0.5-1% only). Read more...
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I realize that so much emphasis has been placed on the choices that one has made in relation to companies that one had bought, that almost no one mentioned about those that one had correctly avoided ! I guess I could not think of a more appropriate title, hence "avoiding the duds" sounded reasonable enough. The same logic applies to mistakes as we can classify them according to "omission" and "commission". Commission means purchasing a company which is a dud and later makes you lose tons of money; while omission means NOT purchasing a company which later turns out to be a star, thus it is mainly opportunity costs.
If we turn the tables around, the same logic also applies. If one consistently avoids buying the "dud" or "over-hyped" companies, one can indeed prevent a substantial loss of wealth. Remember that preserving capital is also one good way of building wealth, as Warren Buffett advises us to "Never Lose Money". Even though cynical readers may point out that I have "lost money" due to this bear market and sharp recession, my argument is that over the long-term, I am confident of adhering to the mantra of "not losing money". This is because I feel that aside from choosing the right companies to take a stake in, it is also important to spot the danger signs for dud companies which may later implode.
Just to give some examples of the companies which I had considered but rejected, they fall into a few broad categories. One of them is "wrong business model", which is what happens when I first review a company's basic business model and decide that it cannot possibly sustain a competitive edge. Either that or the business model seems flawed, risky or inherently unsound. One of the more recent cases which comes to mind is the company GEMS TV, which was listed a few years back. This is a company which sells gemstones through television (akin to TV Marketing) and they had penetrated the UK and USA market. Back after its IPO, it was trading at around $1.50 and analysts were fervently touting for target prices as high as $3 (yes, you heard me right - I still have that report !). By studying the underlying business model, I decided that buying jewellery is a personal process and most people would rather go down to stores to try them out. Moreover, advertising is an expensive business and would require huge upfront capex with limited chances of success (it's a retail operation, not a contract-based business). Hence my decision to avoid the company even though analysts were bullish then. The benefit of omission has saved me a ton of money as the company has gone on to announce 4 consecutive quarters of losses and is now trading at 3 cents per share. It remains to be seen if the company can pick itself back up to its glory days when it IPO-ed.
Another category of companies which I will avoid are those with razor-thin margins. Some industries are effectively commoditized like semi-conductors and PCB Boards so the margin is extremely thin (close to 2-3% or maybe less). This means that a small escalation of costs from suppliers would trickle down into an avalanche for the company, who may have problems raising prices due to lack of pricing power. Some examples would include Chartered Semiconductor (which recently did a rights issue) and Jurong Technologies. The former has seen massive losses due to the plunge in worldwide chip demand while Jurong Tech has been suspended pending the outcome of judicial management proceedings as it was served statutory demands from several banks. Other companies which I have noticed with very think margins are Surface Mount Tech and also Olam* (surprisingly, this "blue chip" has margins of about 0.5-1% only). Read more...
