Sunday, 21 February 2016

Rolf’s investment philosophy (Part 2) – Understand the business!

In Part 1, aside from the Fundamental/Technical analysis skill which is also important, I reminded the need to build a character to be a successful investor. Part 2 here, I will explain why it is even more important to understand the business. 

A decade ago, I was still an engineer. In office, I perform calculations and software analysis. Outside office, I wore coveralls/helmets/cleanroom suits perform site measurements, talked to clients and got myself dirty on rigs/ships, construction sites and semi-conductor cleanrooms and travelled frequently. Due to health issue, I left my job and joined another company as an engineer initially supporting the sales. Soon, I become a sales guy myself.  My ex-boss who is the owner and also sales-driven by nature, will always emphasize to me the importance of “KNOWING THE BUSINESS” even up to today when we met. He already retired from the business world.

Do I truly understand “what is business” at that time? Egoistically, I thought so! REALLY?


Fast forward ten years later, after travelled widely to close many business deals in many different countries, meeting many business leaders and learn from them, seeing many problems of businesses and how they succeed and fail…etc, I think I finally understood what he meant.

Understand the business, not just the financials

Simply, understanding the business is about understanding the reasons why a company can continue to generate its income and profits. 

It is also many other factors! It is the macro big picture conditions such as global, country or industrial changes/policies affecting the company. It is about being a monopoly, oligopoly or in free market position. It is about economic moat. It is the management team and their business acumen to make right decisions. It is the culture and foundation of the company. It is customer satisfaction and how to make them come back for more. It is product innovation, process optimization that leads to efficiency and effectiveness. It is understanding competitions and how to have a competitive edge of a company. It is plans to change and grow the company. It is long term outlook of the company. It is good project execution, supply chain and after sales market. It is about leaderships and building relationships. Above all, it is about people! It is about many things... and of course financially, strong balance sheets, efficient use of debts, so on and so forth.

Essentially we also have to understand the various stages of a company evolvement, because at different stages the company will encounter different problems. A business evolution is about stages of:

1)     Idea to customer
2)     Customer to a functioning enterprise
3)     Functionality to effectiveness
4)     Effectiveness to self-sustainability

Another matrix that I use frequently in my business presentation is SWOT, meaning Strength, Weakness, Opportunities and Threat of a company. 

Quote from another blogger 

One of my favourite bloggers, Chin Wai of The Boring Investor who had been investing for 30 years have this to say in his recent blog post “The Evolution of An Investor”: 

“.... A few months ago, I realised that I should begin to learn how to make business investments instead of financial investments. That culminated in a 20% concentration in 1 stock....

By financial investments, I mean investing in stocks with good profitability, strong balance sheet and high cashflow. However, I seldom go deeper to understand the factors that give the company its good financial strength. The business investments are to identify and invest in those companies that have strong long-term underlying strengths.” – Lee Chin Wai

Why is Warren Buffett so successful?

I mentioned in Part 1 my love to read biography of famous people. I had read Warren Buffett’s "Snowball" bio, and other books/articles/videos related to him. Many people may attribute Buffett success base on his exceptional analysing skills and ability to calculate accurately the intrinsic values of the company.

That is only one side!

Buffett is not only adroit in understanding the underlying business of a company, but also extremely adept in appointing the right management team to run the business he owned.

How did Buffett manage to have this exceptional ability?

Buffett started earning when he was 6 years old and did all sorts of jobs selling chewing gums, coca cola drinks, pitching newspapers etc before starting businesses in pin-ball, golf balls, stamps, car-buffing and developed many other means of earning money, all before he turned twenty. In his pinball business venture, Buffet also displayed his eloquence, sales and business instinct. He was able to convince the Barber owner that he is representing Wilson’s Coin Operated Machine Company, and that the Barber will have no risk putting the machine in his store, which they will split the profits earned. 

This is just one example. Buffett is already a business man in his teens! His remarkable business acumen is one critical factor for his success in investing, which is often overlooked by many!


Understand the business by building up your human capital

Not everyone is born like Buffett to have such incredibly good business acumen at a young age. Or not everyone have a business savvy parents who have time to inject the business knowledge to them at a young age. 

The most natural way of understanding more about a business is via our CAREER then. 

From a start, choose a career that you will be passionate forever (preferably) and one that allows you to learn the most of the business instead. Learn more is more important than earn more for a start! By knowing the business, I mean at least have idea of the business process. For example the biggest reward in my career is the experience of having an overview of entire business process from Sales, Project, Engineering, Procurement, Logistics, After-sales department to Finance and Human Resource.

Even if you do not have the exposure, you can always speak to people from other departments to at least know more about the business! Normally sales person will have an edge in understanding the business more than other roles. However personally I think it is not advisable to start with a sales role after graduation. It is better to be more technical and project savvy before transiting to sales at a later stage. 


Leverage on human capital to build wealth when young

In the process of building our human capital, NOT only we learn business in a more “practical sense”, we can also eventually accelerate our wealth! This can help in building for ourself a substantial investment portfolio. Ok…maybe you do not need the money because your parents can give you the first pot of capital to invest. But I bet you that investing with your own hard earned money is different from money you received from others.

Remember, size matters in investing!

Do not get me wrong, I am not saying we should not start learning investment young. In fact, financial literacy education should start as early as possible. The whole idea is PRIORITY must be set right at different stage of our life. IMAGINE for the first decade of your career, you have developed an impeccable human capital to generate comfortable income. You are able to build your family, pay for your own house or even rental property within manageable debt. During this period, you polish your financial literacy skills (as hobby) and learn to live within means. Hence you also have excess cash to invest slowly.

Think about it : Human Capital (first) + Financial knowledge & Capital (ongoing) and WHEN TIME IS RIPE, to be unleash full power at a later stage (Planned for).

Isn’t it better than just only having financial literacy?

Do not ever use investments or blogging to escape your day job! 

Sorry, I am going to be brutally honest for readers to delve deeper into their thoughts. My take is 

If you cannot even handle or progress well in your day job, do you really think you can become a good investor part time at night?“ 

Or else, why don’t just gather the courage and quit your day job entirely to be a full time investor or entrepreneur. Oh… the excuse of no income to cover my expenses? Then just do a good job at work first and stop complaining!

Read:

Building human capital does not mean No Forever Financial Freedom!  

Please do not misunderstand my notion of building human capital as being a forever salaried worker running the never-ending rat race.

A developed human capital can allow us to: understand “business” better; to have a pool of business contacts; to learn how to develop relationships and manage people; to have the right amount of startup capital etc. In other words, MORE EXPOSURE, MORE EXPERIENCES, & MORE WISDOM! With these attributes, then you can much easier to have what it takes to become a successful entrepreneur or a successful investor later.

In the blogosphere, there are two examples of bloggers leaving their successful corporate career to pursue the second career of their own in their 40s. They are Andy of Tacomob who had rose through his ranks in corporate MNC for more than 20 years to the rank of SVP before he left his salaried job. Similarly Jared of SMOL left his successful career in corporate MNC having accumulated vast experiences including working overseas in China and Greece.

Ok, you don’t like to work for others the day you graduate! It is admirable and perhaps if time rewinds, I may take this path too! But then, make sure you have that burning desire of success, high levels of passion, commitments and perseverance!

Alternatively, you can also start planning of building your own business PART TIME, while building your human capital as a salaried worker. This is also a good way, so that you can still sustain your current lifestyle expenses.

Learn from the Veterans!

In my late 20s / early 30s, when my career took off to new height, I was egoistic and to a certain extent arrogant. I tend to think that the older colleagues are useless because they are slow and talk only, little action. And worst of all, always using their seniority to impose ideology on others. In mandarin we say 倚老卖老. Nowadays I stop thinking this way. When someone who is older with more experience gave advices, I will pay more attention. For the veterans with their vast of experiences and track records, there ought to be certain logic, why they are saying certain things.

Don't discount it immediately!

Listen, filter and absorb the good advices that are most relevant for you. You can learn a lot! Be it in business, investment or in life!

It is ideal to have a Mentor who can provide you with invaluable advices in times when you need to make critical decisions in our life. Take note that the mentor ought to be someone who is qualified with abundance of LIFE EXPERIENCES AND WISDOM!

Depending on your character of extrovert or introvert, an alternative good way is to learn from books. Have an open mind, read, talk to people and absorb readily. 

Do not over-rate yourself

If you have less than 10 to 15 years of investment experiences without going through several bear and bull cycles, you still have a long way to go in investment. Me included in this category. We are no gurus! Just re-producing Warren Buffett and Peter Lynch's theory is cheap! Let the experiences and track records do the talking, otherwise just admit the mistakes and don't hide behind the curtains. 

Many retail investors, after they start to earn some money from the bull-run in last 5 years, start to be full of themselves! Many think they are better than any professional analyst/fund manager. They said “professionals cannot even beat the market while they can get double digit % returns p.a.”

Yes, I agree that there are many crappy professional analyst / fund managers!

That said, do also remember that professional money managers/analysts DO HAVE their own constraints in work. Maybe as a manager of their OWN MONEY, they are not as dumb as you perceive them to be. Unlike retail investor, large mutual funds cannot sell their stocks when market downtrend and liquidates everything in cash. They have certain restrictions to stay invested and only keep say 10-20% in cash. They also hold large portion of share (millions). If they sell, it will cause stock price fall even further. However retail investors like us can happily buy and sell without moving stock price at all.

Stay humble always, admit mistakes and learn readily. Do not overrate our own capability as sometimes it can be just fooled by randomness!


PS: My blog is a library for my children where I document down my journey of life evolvements. 

Stay tune to Part 3 when I will discuss my strategy to build a Rolf’s equity portfolio!


17 comments:

  1. Hi Rolf,

    I agree with the part about work, but just about performance but that it should have you passion and joy.

    We might lose it for a while, the longest I lost it was about 9 months I think. It might not seem very long but when u feel like quitting, 9 months is a long time.

    I advise giving ourselves a second chance especially if one uses to love the job, it could be just those down time and we get back on again, this time with more vigor !!

    As for understanding business, I have a slightly different take. We do not need to be in the industry to know the industry ( ya I know what peterlynch says about insider knowledge)

    Simple, in our life time, how many industry can we be in? Perhaps 2? Can 2 industry provide diversification?

    But I am totally with you when you say understand te why before the numbers. I am also quite sick of people talking about numbers at face value. Like the loan ratio so high, I will give it a miss. Why is it high?

    It is short term loan, long term loans, bullet loan? Is the loans for property or inventories?

    If lee metals do not take a big impairment on their inventories this year, I think their business model of using very short term loans to let inventories "fast in fast out" is a thumb up. I am not bothered about their loan ratio.

    As a armchair investor and not an insider, we howver must be humble that however we read industry report or peers reports, we might be wrong and hence I will never do focus investing ( more than 20% ) for any one counter, trying to get everyone to be below 10% from the current 15%.

    That's why when u said O&G need order book for their loans, I understand what u meant but still think as an outsider it makes little economic sense ...

    You just inspired me to another post

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    Replies
    1. Hi SI,

      Long comments. Tks for the effort. I will return with a long one too. Hehe!

      Nod nod nod, passion and joy is important.

      I wrote in above article "From a start, choose a career that you will be passionate forever (preferably) and one that allows you to learn the most of the business instead...."

      I also wrote an article two years ago with few paragraphs relation to "passion" . Refer below.

      http://www.rolfsuey.com/2014/03/understand-rolf-suey-understand-yourself.html?m=1

      In fact, passion of career, need not to be business related, it can art, sports, design etc... But since we r talking about investment, hence I mentioned business here.

      For all u know, I was a part time tutor for 10 yrs and hence my utmost respect for teachers!

      Life is as such that we will feel up/down and sometimes loss and make terrible mistakes and even hate the person we loved, unconsciously!

      It is ok, as repentance n forgiveness is above all!

      Yes, I m not saying we need to be in the industry to know the business. I am saying we need to understand business in general to know better what is the true stories of a stock!

      Business acumen once established can be applied to many different places. I had a client who use to own Miclyn offshore - by the name of Michael Kum. After selling his offshore business in 2007, he is now in Hospitality business accelerating his net worth to $800mio. So offshore and hotel? Not related! I

      It is the business sense, not how many industries u r in before?

      It is difficult to acquire business sense without practice application, hence most of bloggers will spend all their effort in the financials which they can access via reading.

      But very soon, they will realize even with hours and hours of researching day in day out, their stock portfolio is still not doing so well.

      Then many years later, they will start to wonder... what the hell goes wrong?

      Maybe by then, they will say they should just spend the minimum criteria of reading up on a stock/reports! Jot some simple notes and decide yes or not! If yes, hit the buy button! Then after that, just ignore the stocks and better spend quality time on family, hobbies (blogging included) or career.

      Look forward to your post! :-)

      Delete
    2. But I do agree that only practical experince can one make sense of business execution.

      Look at logistic. CWT and singpost, both captured investors' attention. The tactic is similar, create a vertically integrated business that feed on each other. Singpost used e-commerce to fill the warehouse, CwT used trading of commodity.

      But it does not mean anyone that pursue this tactic is wonderful business ... The execution ... What is good what is reasonable, only those with on hands experince will be able to tell

      Delete
  2. It is still better to become wealthy through our human asset but can be supplemented or accelerated by our financial assets.

    Now we read who is talking facts and truth.

    Commercial bloggers who have vested interest are telling us that we must spend more time and effort on our investing or hobbyist blogger taking his time, energy and effort to tell us the fact and truth behind human asset (capital) vs. financial assets . Good job! :-) :-) :-)

    ReplyDelete
    Replies
    1. Hi CW,

      Thanks for the compliments! Learn a lot from u also.

      We are the minority in the financial blogosphere who r aligned on this theory since awhile back.

      I remember when I just started blogging/commenting, I was mocked by many bloggers when I mentioned about building human capital. They said including some extremely popular ones:

      "they will become owners of many companies shaking leg and collecting dividends while I slogged working hard for maybe the company they owned. One even more Ridiculous comment is even the CEO is working for them since they owned shares of the company."

      After I hear that, I began worry for the future of Singapore! Imagine China is so hungry and HongKong is so competitive...

      This spur me to write more reality articles here so that my kids and also Singapore future generation can have more wisdom!

      I want to live to see Singapore to do well before I closed my eyes!

      Delete
    2. Hi RS,
      Can feel the FIRE in you! Lol...
      Good job!

      Delete
    3. Hi Dennis,

      Tks for dropping by. May I know what type of FIRE you are referring? Financial Independence Retire Early?

      :-)

      Delete
  3. Rolf,

    Remember the first time I came to poke you?

    My first impression of you was that you sound very refreshing and quite different from the rest of us.

    Poked you like a fish to verify you fresh or not (有影吗).

    Wah piang oil!

    Turned out you not only alive and kicking! You are deep ocean fish! Got fight with Blue Fin Tuna or Norwegian Salmon kind!

    Definitely not fresh water fish ;)


    Psst. Be careful of CW. He's the fisherman. More worrisome of all, his travel pictures got show him eating fish dishes...

    He likes fish!

    ReplyDelete
    Replies
    1. Hi Jared,

      You poked all newbies leh. Just like Army SGT tekan all new recruits. Now a lot of us already POP or even ORD! We call you Encik! Hahaha….

      In my real life, my best friends now, are always those 不打不相识! Small fight is not a bad thing afterall because it allows us to understand each other better. Petty is not my name since day one… Pretty is! :P

      I am not fresh anymore lar. Seasoned salted smelly fish liao! I don’t want to be salmon, nor tuna to be catch by CW. If really need to be fish, I want to be like Stephen Chow’s “Mermaid”, NOT the big old one in the bathtub hor?

      CW and temperament are lao Encik fishermen! They can fish without hook like Jiang Ziya, and yet can catch!

      Time flies, it has been two years since I started blogging and I am happy to know all you people here! Who peel Onion???

      Delete
  4. Hi Rolf,

    Nice to know more about your background. I agree that having a technical background before transitioning to a sales person is good, at least this way one know not to over promise and bullshit too much. However, I went straight into sales job too and took up technical stuff along the way. Sales pay more ma... haha!

    I think you really like your sales job and I am glad I have a like-minded peer in this blogosphere! :)

    ReplyDelete
    Replies
    1. Hi Jes,

      Just to let u know I never transit to sales on my own accord. And since graduate, I never expected that I will ever get into sales. Because of how I behave in front of client, my ex-big-boss (not my direct superior) just one day, tell me tmr u become sales! And that's it! Because I was truly quite obedient to my big boss (owner) bcos I respected and trusted him.

      It was never about the money for me!

      Counter intuitively, after I did well in my sales job or managing the sales, I started to hate it (I thought then). Because I thought I wanted more than just a sales role! So I jump ship n became a "commander" of hundreds from tens! I like it a lot also.

      After all these years, I realise for me, its not a matter of I like my sales role or "commander" role. I can dun do sales and still be happy frankly!

      I had seen people who work very hard to become a good sales person. But the character, acumen is not there, it's not there!

      It's suitability also and how a person manage to explore their own strengths after they truly know themselve well.

      For me, ultimately I like to deal with people! Even not sales job, I can still like.

      For u, even not technical initially, no problem. But u know urself well if ur character fit is more impt! And in doing so, do u feel happy and motivated.

      FYI, I had never get a single cents of commission before as a sales personnel! Was all fix salary! Satisfaction is IMPT to me! the joy of closing an order and making deals with people! And the trust, problems, solutions that people n people go through together is also amazing!

      Delete
    2. Hi Rolf,

      Woah I am very surprised, no commission for sales person? That's weird but good that you don't need money to motivate you. The correct motivation should of course be the long term network that will be established.

      Truly agree that satisfaction is more important. Meeting people energizes me and I am sure you feel the same way. You are definitely suitable to be a commander, so hope I can one day be the same as you :)

      Delete
    3. Hi Jes,

      In my segment, normally it's unusual to have on the contrary. Maybe the value of the contract is bigger and also time take to close a contract can usually be at least 6 months to even 3-5 years.

      If meeting people energize you, then I am sure you will do very well in your career and continue to love what you do.

      I am nobody now, but if I really be somebody one day (in my opinion) is when I am already starting my second career focusing on helping people around me more than earning money.

      Delete
  5. Hi Rolf,

    You raised a good point about building up the human capital first. It really can improve your personal finance and investment skills later.

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    1. Hi FS,

      Tks for dropping by. The seemingly irrelevance in one experience now sometimes may be the most relevant and valuable experience. Just look at Steve Jobs calligraphy experience applying to his computer.

      Delete
  6. I read this article and its tell me how reading lesson about business and how to learn business account maintain skills in college by accounting book thanks for share it good social work personal statement .

    ReplyDelete
  7. I almost like the first part of this post and I really was waiting for the next part and here it comes. Thank you so much for this post and I really enjoyed it. Keep posting and keep sharing.
    Registered Investment Advisor

    ReplyDelete