How to start investment : investment analyst -The Decision Process Buying shares is a risk !

How to start investment? 

I feel are equally important if an investor wishes to obtain a successful, consistent and decent return on investment.
  1. As part of my concluding posts for this month, I shall be doing two major recaps on value investing and will be focusing on two major aspects which,
These two sections shall be split into “Research and Analysis” which gives a revision on what one should focus on with regards to the numbers, financials and operating statistics; and “Behavioural Finance and Temperament”

which sums up the emotional fortitude and attitude an investor should have when he approaches investing and the stock market.

I guess readers can take these two posts as a final culmination of my 4.5 years of blogging and intensive thinking and analysis on various companies.

I shall give my best attempt to distil my current knowledge and understanding of the proper concepts of investing into these two posts.

Note that following these two posts, there will be another final post on my investment journey and (this) journal, which will essentially sum up my personal thoughts and feelings on my investment journey through these years, and how I have grown and matured as an investor.

No doubt the input of many other esteemed value investors was also taken into consideration in making me who I am today, as well as a list of very established authors and articles which I had read (and absorbed) over the years.

I wish to thank these people in advance for enriching my life and journey and making it more meaningful and fruitful.

The Research Process

This involves preliminary research and gathering relevant and useful information about a potential investment opportunity.
The research process is often rather time-consuming and tedious as multiple sources of information would have to be found in order to move on to the next stage – the Compilation Stage.

An investor can usually start out with the most basic source – the Company’s Annual Reports for the last ten years. This should be followed up by recent corporate announcements, and then any industry reports if applicable.

Research should attempt to be as broad-based as possible, and to include all pertinent and relevant sources of information which may assist in the decision-making process.

Most of the information obtained will be from public sources, but it does not hurt to go direct to the source if possible and set up and interview with either the Operations Manager, CFO or even CEO. This is truly a case of Phil Fisher’s “Scuttlebutt” technique,

where the investor “gets his hands dirty” in gathering information directly from the Management themselves.

Of course, such information is necessarily biased, and the investor should objectively assess the information to ensure he is not unduly influenced by Management’s expected optimism.

The Compilation Process

How to start investment : investment analyst -The Decision Process Buying shares is a risk !
How to start investment : investment analyst -The Decision Process Buying shares is a risk !

Compilation is a process which collates and aggregates the information, either on a Word document or an Excel spreadsheet.
This enables the investor to better make sense of the huge influx of information which he must have obtained from the previous process of research, and also to summarize and make sense of the information in a meaningful manner.

Compilation may take quite some time as the facts need to be arranged in a logical sequence, which could includes (but is not limited to) chronological sequence of events,

arrangement of inter-connected facts and figures (examples, setup of new business divisions and their associated operating margins) and year~ on~ year comparisons of key ratios and metrics (like ROE, margins etc).

At this juncture, perhaps I should mention that the way the information and data is compiled has quite a heavy bearing on the next process, which is analysis.

If the information is not compiled in a logical manner which makes it easy for the investor to trace the fortunes of the Company over the years,

then he is likely to be either unable to make a conclusion on the investment worthiness of the Company, or worse still,
may make an erroneous conclusion which may result in permanent loss of capital.

Generally, the “proper” and sound way of compiling information is to ensure that one moves through the Company logically, from quantitative to qualitative; from business divisions to strategy, and so on.
It can be argued that the substance of what is compiled is more important than the form, but I would insist that the presentation of the information also be coherent to an outside reader such that the investor and him would be able to glean the same insights using the same sets of data.

How to start investment : investment analyst -The Decision Process Buying shares is a risk !
How to start investment : investment analyst -The Decision Process Buying shares is a risk !


investment analyst

At this juncture, perhaps I should mention that the way the information and data is compiled has quite a heavy bearing on the next process, which is analysis.

If the information is not compiled in a logical manner which makes it easy for the investor to trace the fortunes of the Company over the years,

then he is likely to be either unable to make a conclusion on the investment worthiness of the Company, or worse still, may make an erroneous conclusion which may result in permanent loss of capital.

Generally, the “proper” and sound way of compiling information is to ensure that one moves through the Company logically, from quantitative to qualitative; from business divisions to strategy, and so on.

It can be argued that the substance of what is compiled is more important than the form, but I would insist that the presentation of the information ,

also be coherent to an outside reader such that the investor and him would be able to glean the same insights using the same sets of data.

The analysis process can be described as the most difficult aspect of investing as everyone may look at the same data or information, yet come up with completely different conclusions.

This is where the “skill set” of the investor comes into play, as he must draw on multiple disciplines (as mentioned by Charlie Munger, Warren Buffett’s business partner) in order to form a mental model of whether an investment looks attractive.

Numerical and quantitative data must be assessed and analysed to identify trends or spots of competitive advantage which differentiate one company from another; and the same investor must also be alert to potential danger signals or “red flags” within the numbers (e.g. inventory levels, receivables days, declining gross margins) in order to identify potential weaknesses.

Suffice to say that the investor requires a very keen eye and an even sharper mind in order to make sense of the voluminous amount of information and draw meaningful and logical conclusions.

Numbers aside, analysis also involves areas of business analysis (as shares are, after all, part-ownership of a business) such as marketing, corporate strategy, management, human resource (staffing), operations and administration.

Obviously, one cannot be knowledgeable in all aspects of a business, but it is important to at least have some awareness of how major decisions in these key areas influence a company and affect its competitive advantage, growth prospects and stakeholders.

Porter’s Five Forces come in handy and some investors also take it upon themselves to do a SWOT analysis to enhance their understanding of where a Company stands.

Other types of analysis which may be employed would also include (but is not limited to) a PEST analysis.

The final and possibly most important (yet somewhat nebulous) aspect of analysis is that of the integrity and character of key Management personnel and Directors.

This aspect can only be independently assessed if the investor undertakes to personally visit and interview the Management and/or Directors.

A very good opportunity usually arises by attending the AGM or EGM of the Company, whether as a minor shareholder (e.g. buy 1 lot to be invited to the AGM) or as an observer.

Subtle cues can be picked up to see if Management is evasive, upfront, candid or simply cannot resist the so-called “institutional imperative”.

The Decision Process

The decision process would immediately follow the analysis phase, and is a validation of the analysis process.
Once the all-clear is given in terms of the analysis portion, meaning there is green light to go ahead, the only “hurdle” left would be to determine a suitable valuation to purchase.

This is the tricky part where one has to assess metrics such as P/B, PER or use a rudimentary form of DCF analysis with assumptions in order to “model” a fair value for the Company.

While Buffett uses “intrinsic value” to encompass the entire business and its characteristics (including intangibles such as goodwill, patents and trademarks),

this concept would imply a value which is in excess of the sum total of the net assets on the Balance Sheet, and therefore is difficult to pinpoint with precision.

Hence, being approximately right in obtaining a value and purchasing at a margin of safety is much better than being precisely wrong.

Conclusion

How to start investment : investment analyst -The Decision Process Buying shares is a risk !
How to start investment : investment analyst -The Decision Process Buying shares is a risk !

The above pointers are just a brief summary of the research, compilation, analysis and decision-making process which has now become an integral part of my stock selection process.

My criteria has been mentioned before in previous posts and I will not repeat them here again, but this post is just to collate my final thoughts on this topic and to provide a summary of how to go about the often tedious,

but ultimately rewarding process of finding and purchasing an excellent company. If I’m completely honest, I’m feeling a little nervous about getting into investing.

What if I lose everything? As I mentioned in my post on planning for retirement ,

one of the good things about being young when you’re working on your retirement is that you have time on your side. The other benefit is that you can afford to be more aggressive on investments because you can afford to make a few mistakes.

investment account

The truth is, when it comes to  investing, sometimes you need to take risks to make any progress. There are different levels of risk, but if you leave your life savings in a long term savings account you’ll have enough to deal with inflation and maybe a little spare here and there,

but not too much else, as the prices of everything else will rise somewhat proportionately.
I read a book that was discussing investing and it said if you don’t take a risk you’re taking more of a risk. 

Putting your cash in a savings account and letting it sit there, barely growing, is a bigger risk than trying something.

I am not suggesting you run out now, withdraw all your savings and throw it at some shares, but I think taking calculated risks is less of a risk than doing nothing.

Buying a property is a risk – what if the market drops and you find yourself owing more in mortgage repayments than the property is worth?

Buying shares is a risk – what if the market drops and your shares are worth nothing?
Studying at university is a risk – what if you spend tens of thousands of dollars on your education only to come out jobless?

But it can also be said that buying a property, investing in good shares and studying could be three of the best investments you’ll ever make, right?

You need to make calculated risks, weigh up the pros and cons and move forward. The month of May is all about saving for me, but the next month all the money I make will be going into managed funds. After that, I’ll start investing in shares.


I’ve started reading a little more to do with shares so I can make informed decisions. I’ve started browsing the online exchanges to see what shares are rising and falling – and by how much.

 I’m learning about a stock’s , which is what it’s actually worth rather than the value it has on the stock market.

I’m not rushing in until I know more about everything and can make a well-informed, educated decision.

So if you’re looking to start investing, I say start with educating yourself. Follow the market for a while, pick some shares you think will do well and map their profits or losses over the course of a few months.

Why did their value rise or fall? What would you do differently? Learn before you’ve even put a dollar down and chances are your investment will go much more smoothly.

I’ll be sharing on my blog my honest trials and tribulations as I move forward with investing.


For those of you who are further along this journey than I, please feel free to share some investment resources you’ve really enjoyed. I’m all ears!



message to you : - educating the children .....

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