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Invest In Businesses You Understand
Education | 27 August 2010
By: jason.liew
Articles (66) Profile

By Chiang Kian Seng

Where is our stock market heading? Can the market go any higher? Are stocks now overvalued? Will there be a double-dip? What stocks can I buy now? These are but some of the more frequently heard questions that are buzzing around our stock investing community recently. Honestly, no one can answer with 100% accuracy as to where our stock market is headed. What we can do is to look at what is the current state of our stock market and apply the correct strategies that best fit the current situation.

So, what is the current state of our stock market then, you will ask. Well, throughout this whole year, the Singapore stock market has been stuck in a range bound mode, with relative low volumes and somewhat unpredictable in nature. As at the time of writing, the STI is hovering around the 3,000 mark, which is about 60% back up to where it was at its highest level of 3,906 points in October of 2007. Some sectors and industries have recovered quickly, while others are still lagging behind. So, it is still possible to find some good stocks, which are now still selling at good valuations and are providing good yields, in terms of dividends or distribution per unit (DPU). However, a company’s fundamentals are not always the most important criterion for the purchase of its stock.

One important criterion that a lot of investors overlook when choosing the stocks to buy is one’s understanding of the business that the company is in. It is especially important now, given the current state of our stock market. When looking for a stock to invest in, it is best to look for a business or industry that you understand easily or have an interest in. This gives you an advantage in understanding for example, how management decisions will affect the business, what kinds of improvements to goods or services will be appreciated by their customers and will improve sales, the economic climate of the industry that the business is in and thus, will be able to judge when bad times are around the corner.

Taking a Real Estate Investment Trust (REIT) that runs shopping malls as an example, you could ask the following simple questions when you next visit them.

  1. Are they crowded?
  2. What is the tenant mix like?
  3. Do they change the tenant mix often? If yes, then how often?
  4. Are they in touch with the community around them?
  5. What kind of activities do they have to attract people to visit?
  6. How frequently do they upgrade their facilities, for example, the frontages of the shops, toilets, etc?
  7. From what age group do the people who visit these malls fall into and what kind of amenities, like restaurants, cafes, cinemas, amusement centers, etc, are available to cater to this age group?
  8. What extra services does the mall provide? For example, do they provide a shuttle bus service to bring people to the mall from outlying areas?
  9. You could even visit the toilets there and judge if the management is putting in effort to keep the customers happy.

These are easy questions to ask and the answers are equally simple to understand. But this is only true if you understand what it takes to run a shopping mall. After all, the ultimate goal of a shopping mall business is to attract as many people as possible to visit and shop there.

Knowing what questions to ask and understanding of the answers will allow you to be a good judge of whether the company is running its business properly or not. A good understanding of the business allows you to continually ask these same questions and closely monitor the state of affairs of the company of your choice.

With the current unpredictable nature of our stock market, it is quite likely for stocks of companies with solid businesses or with products and services that are flying off the shelves to experience a dip in prices. This often happens not because there are fundamental flaws in their businesses, but rather because some of the people who bought the stock in the first place do not have a long-term view of the value of the company and are selling for other reasons instead.

These dips in prices provide fantastic opportunities for the prudent investor who knows and understands the business of the company well. His understanding gives him the confidence to step in and buy value stocks at a discount.

Chiang Kian Seng, Trainer at FXDS Learning Group Pte Ltd, has more than 3000 hours of experience
in trading and investing in Stocks, Forex and CFDs. To learn more about FXDS Learning Group and the
financial education courses they offer, please go to www.fxdsgroup.com.


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