转载: How to invest in the right business

虽然看过很多类似的文章, 可是这次读这篇却让我有很多想法,感慨.

转载自:
http://biz.thestar.com.my/news/story.asp?file=/2007/7/4/business/18203729&sec=business


How to invest in the right business

There are four main criteria in choosing the right business for investment. They are a business that can be easily understood; has favourable long-term prospects; has good management; and attractive pricing.

BUYING stocks are like buying businesses. How do you select the right businesses for long-term investment?

Selecting the right business to invest in is always a tough decision. Warren Buffett, in his address as chairman to Berkshire Hathaway shareholders, said he uses four main criteria to select the right business: a business that he understands, one with favourable long-term prospects, one that is operated by honest and competent people; and is available at a very attractive price.

Buffett always stresses on staying within our circle of competence. As the value of a company is dependent on the present value of its future cashflow, a business that we buy must be simple and have stable and predictable future cashflow.

According to him, “What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know. An investor needs to do very few things right as long as he or she avoids big mistakes”.

Hence, we need to understand the business that we invest in. We may miss out on many good opportunities in investing in some Mesdaq companies with new technologies. However, it is safer to miss out on these great opportunities if we cannot comprehend how these businesses generate their cashflow.

For a company to have favourable long-term prospects, it needs to have a good economic franchise, strong long-term pricing power, and high entry barrier. It needs to be able to command good product pricing by not losing its market share or increasing its production volume at minimal additional capital investment.

A company that has strong pricing power and purchasing power will enjoy handsome profit margins.

Besides, we need to identify the dominant players in an industry. Normally, these companies have the competitive strengths that their competitors and potential entrants find impossible to emulate. One way to check on these is by looking at the absolute amount of their turnover. In Malaysia, a company with a turnover of above RM500mil a year can be considered as one of the key players in its industry.

According to Mary Buffett and David Clark in their book titled The New Buffettology, there are four areas in which Buffett discovers companies with hidden wealth. These companies have durable competitive advantage over their competitors. The four areas are:

# businesses which have a repetitive consumer need with products that wear out fast or are used up quickly and have brand appeal

# the advertising business

# businesses that provide repetitive services that people and businesses are consistently in need of

# products that most people have to buy at some time in their life.

These four areas are very closely related to consumer demand and expenditure.

As a result of the recent accounting frauds involving Transmile Group Bhd and Megan Media Holdings Bhd, investors began to have doubts over the management of other listed companies.

Philip A. Fisher, the author of investment book Common Stocks and Uncommon Profits, stressed that investors must choose a company with a management of unquestionable integrity.

As retailers are minority shareholders with no controlling power, the company’s value will very much depend on the management and investment decisions made by its major shareholders. 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. They may also need to pay attention to some negative rumours spreading in the market. In most times, negative rumours carry more weight than the positive rumours.

Lastly, we will only buy a business if it provides a margin of safety. 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 way to judge how cheap a stock is by looking into its price-earnings ratio as compared with that of its competitors.