It was like 3 weeks since I last posted something here. It's not that I have run out of things to write, but it's because I am too busy with my things on hand. I have recently made a very big decision on my life. I quit my job!! This could be for the better or worse. Anyway, the decision has been made, and there is no turning back now, for me.. I really wanted to share this feeling with someone, but dunno who to talk to.. so well, what's a blog for if it's not something for you to release your feelings within ?
Suddenly realised that I haven't talk much about myself here. To cut the story short, I am a degree holder in Accounting and Finance. Most people thought that I would have gone into a big accounting firm or bank or stock broking firm or something like that when I graduated, back in year 2001. But I didn't. I thought those are boring jobs, so I opted for a job as a sales executive in a chemical plant. Sounds more exciting and interesting as the incomes were based on commissions, so the potential of making it big time is higher, and there were more things to learn, I so thought back then, when I was much more naive than I am now. Anyway, as the years go by, I was transferred from the sales department to project management, to build a new plant and operation head to start up a new plant and so on. Basically, I have involved from A to Z of starting a business. And without noticed, I am already getting a pay which is few times higher compared to when I first joined the company, and I will have an easy and confortable life if I stick to what I am doing, at least for another few more years. I should be happy by now. But I am not! I felt like I have to move on and away from this comfort zone in order to grow. And hence, I have tendered my resignation and I will officially unemployed from the 31st August 2007, coincided with the Independence Day of Malaysia.
Well, life's gonna be different when I am all alone out there, I think. And I also have to figure out how to make a living going forward. But I have a rough idea in mind and an ambition which I so wish to accomplish in my life. I wanted to be one great investor like Warren Buffett. So, I might want to start off my dream by setting up an investment vehicle like what Mr Buffett did back then with his Buffett Partnership. I wanted to make those people around me, who have trust in me, millionaires, like what Mr Buffett had done to his investors.. This is my target, my dream and I am going to make it happen!!
Wednesday, July 25, 2007
Wednesday, July 04, 2007
How to invest in the right business
I came across a good article in the Star today, "How to invest in the right business" by Ooi Kok Hwa. I have extracted some good points, with my comments:
Warren Buffett, in his address as chairman to Berkshire Hathaway shareholders, said he uses four main criteria to select the right business: (1) a business that he understands, (2) one with favourable long-term prospects, (3) one that is operated by honest and competent people; and (4) is available at a very attractive price.
(1) a business that we buy must be simple and have stable and predictable future cashflow. Understanding a business will allow you to make better judgement on the profitability of the business; major opportunities or threat ahead and etc. That is the reason why, most of Warren Buffett's holdings are very easily understandable businesses, like fast food, theme park, razor blades, newspaper, insurance and etc., which most, if not all of us will come across everyday. He doesn't want to touch those high tech companies that he doesn't understand. That's also why, he was not hurt during the high tech meltdown in year 2000. So, very simply, just ask yourself "will this business make money in the coming years" before you buy any stock. If you can answer it confidently, you certainly have met the first criteria.
(2) For a company to have favourable long-term prospects, it needs to have a good economic franchise (good brand name), strong long-term pricing power, and high entry barrier (difficult for a competitor to set up another similar kind of business). A company that has strong pricing power and purchasing power will enjoy handsome profit margins. One example of this kind of business is Coca Cola, one of Buffett's long term favorite. Other famous holdings of Buffett also include McDonalds, Walt Disney, Washington Post and many more. These are companies that have dominant control in their market respectively and are very difficult for someone else to enter the market overnight.
(3) Investors must choose a company with a management of unquestionable integrity. This is one criteria that Warren Buffett put alot of emphasis on. There are many cruel examples out there on the streets which have washed away hundreds of millions of hard earned money from investors. Hence, investors should always check on the integrity of these managers. Investors need to be careful when investing in companies with high expansion, high trade receivables and poor internal controls. I agree this is one field that is very difficult to justify. One of my ways is by looking into a longer past trends of the company's history. I also like to look at the Director's remuneration package compared to the company's performance. Besides, do your homework in reading more business related news from the paper or internet, where you might be able to find out a thing or two about the company's directors.
(4) Lastly, we will only buy a business if it provides a "margin of safety" These are described by Warren Buffett as the 3 most important words in Finance. According to Benjamin Graham, if a company is selling at a 33% discount to its intrinsic value, the investment is said to provide a margin of safety. One mistake that most investors made, including myself, is overpaying for a business. There are companies that meet all the 3 criterias mentioned earlier, but these do not justified them to sell at super-high valuation. This is one of my main concerns on the China's market. It is undeniable that many China's listed companies have huge potential and are growing rapidly, but, most of them are selling at "mind-blowing" valuation. These are all so similar to the IT boom few years back in the Nasdaq market, where people were chasing high the high profile internet stocks like Amazon, Yahoo and etc, not to mention those that no longer exist today. These are called "over-hyped" valuations.
Warren Buffett, in his address as chairman to Berkshire Hathaway shareholders, said he uses four main criteria to select the right business: (1) a business that he understands, (2) one with favourable long-term prospects, (3) one that is operated by honest and competent people; and (4) is available at a very attractive price.
(1) a business that we buy must be simple and have stable and predictable future cashflow. Understanding a business will allow you to make better judgement on the profitability of the business; major opportunities or threat ahead and etc. That is the reason why, most of Warren Buffett's holdings are very easily understandable businesses, like fast food, theme park, razor blades, newspaper, insurance and etc., which most, if not all of us will come across everyday. He doesn't want to touch those high tech companies that he doesn't understand. That's also why, he was not hurt during the high tech meltdown in year 2000. So, very simply, just ask yourself "will this business make money in the coming years" before you buy any stock. If you can answer it confidently, you certainly have met the first criteria.
(2) For a company to have favourable long-term prospects, it needs to have a good economic franchise (good brand name), strong long-term pricing power, and high entry barrier (difficult for a competitor to set up another similar kind of business). A company that has strong pricing power and purchasing power will enjoy handsome profit margins. One example of this kind of business is Coca Cola, one of Buffett's long term favorite. Other famous holdings of Buffett also include McDonalds, Walt Disney, Washington Post and many more. These are companies that have dominant control in their market respectively and are very difficult for someone else to enter the market overnight.
(3) Investors must choose a company with a management of unquestionable integrity. This is one criteria that Warren Buffett put alot of emphasis on. There are many cruel examples out there on the streets which have washed away hundreds of millions of hard earned money from investors. Hence, investors should always check on the integrity of these managers. Investors need to be careful when investing in companies with high expansion, high trade receivables and poor internal controls. I agree this is one field that is very difficult to justify. One of my ways is by looking into a longer past trends of the company's history. I also like to look at the Director's remuneration package compared to the company's performance. Besides, do your homework in reading more business related news from the paper or internet, where you might be able to find out a thing or two about the company's directors.
(4) Lastly, we will only buy a business if it provides a "margin of safety" These are described by Warren Buffett as the 3 most important words in Finance. According to Benjamin Graham, if a company is selling at a 33% discount to its intrinsic value, the investment is said to provide a margin of safety. One mistake that most investors made, including myself, is overpaying for a business. There are companies that meet all the 3 criterias mentioned earlier, but these do not justified them to sell at super-high valuation. This is one of my main concerns on the China's market. It is undeniable that many China's listed companies have huge potential and are growing rapidly, but, most of them are selling at "mind-blowing" valuation. These are all so similar to the IT boom few years back in the Nasdaq market, where people were chasing high the high profile internet stocks like Amazon, Yahoo and etc, not to mention those that no longer exist today. These are called "over-hyped" valuations.
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