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!
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!