Invest in the Company, Not the Industry

Ever catch yourself saying "(Currently hot industry) looks like it's going to grow, so (company in the industry) is definitely going to grow in the future as well"? Some times I find myself doing it as well, but we should create a clear distinction between the company and the industry. Just because a company is in a hot industry doesn't mean that it will be able to grow in that industry as hot and growing industries tend to attract the most competition

Invest in What You Know

I was just reading Peter Lynch's book "One Up on Wall Street" (realised that I haven't done a book post for a while as well), about halfway through the book so far, but the most interesting thing brought up so far, investing in industries that we know, either as customers, suppliers or employees, sounds like a great idea that we should adopt when investing in shares.

Investing vs Speculating

There's a fine line that we have to thread between investing and speculating, so I think that's important to know on roughly which side of the line we are staying on. As we have come to know, investing is something that brings about good returns in the long run while speculating focuses on short-term gains and bears a much higher risk of losing principle. Anyway, so in this post I'll be covering the differences between the two.

Growth Investing vs Value Investing

Just started reading Common Stocks and Uncommon Profits by Philip A. Fisher. This book seems to be going into growth investing, which I think is good to compare to value investing (You can read on my thoughts on different investing styles at Value Investing and Thoughts on Investing for Dividend Yields). While both share similar ideas (such as fundamental analysis and buying stocks on their "intrinsic value"), they have some differences such as their focus on "intrinsic value" (slight difference between the two in my opinion)

(Image source: http://www.stockopedia.com/content/the-truth-about-growth-investing-it-works-67194/)

Why Fundamental Analysis is the Way to Go

Going to share my thoughts on why I prefer fundamental analysis to its direct opposite, technical analysis in this blog post.

(Image source: http://www.investingstarter.com/technical-analysis-stock-investment/)

Good Companies vs Good Investments

This is just to clear the air and differentiate between good companies and good investments. In a nutshell, not all companies are good companies, but almost all companies can be good investments.
Good companies do not necessarily make good investment nor are good investments always good companies.

Thoughts on Investing For Dividend Yields

In this blogpost, I hope to share my views on investing for dividend yields (something quite popular among other finance bloggers). I do not really subscribe to the belief that by looking at a basket of the highest dividend yield shares would yield superior results to other shares.

Is a good share one that pays out its earnings in dividends?

(Image source: http://zewt.blogspot.sg/2007/09/tax-free-dividends.html)

There are two goals in investing: Dividends or Capital Appreciation, both of which will provide your return on investment. A share paying out a 5% dividend and another whose price is growing at 5% a year is almost the same in my opinion, it is just whether the company decides to reinvest the money in itself or pay it out to its shareholders.

In my opinion, the important part which decides whether a company is better off paying out its dividends or reinvesting in itself would be the return on equity. If it is able to maintain or even grow a high return on equity (double-digit?) which is higher than my expected return on investment, I would be happy to let it keep its money for reinvestment in the business instead of paying it out in dividends. Likewise, a company that pays out a satisfactory dividend is also good.

There are stocks now that offer good dividend yields, look at Jardine Cycle & Carriage, which presents a good dividend yield for a company that is at the low end of their cycle (Read: Jardine C&C: Possible Opportunity for Dividends). These companies are good for people looking for a source of income which they can reinvest or use for their own expenses.

But there are also stocks that offer good value while paying almost no dividends. One of the stocks in this category that I'm watching is Ezion. Though is pays like 0.1 cent of dividend on a one cent share, it has a P/E ratio in the mid-single digits. While it is in the oil and gas sector which has declined considerably since its heyday, the fundamentals of the business still seem sound and even if it takes a hit to its profits, its currently low P/E ratio should be able to absorb it. I like it to not pay dividends for one key reason: It earns a high Return on Equity. around 20%. I would be hard-pressed to find another company that can return the same amount, or even if it decreased to say 10%, it's still better than the market return and the money that the company earns and reinvests in the business can also hopefully earn such a high return which would make the lack of dividends worthwhile.

Needless to say, good dividend yields and consistent payouts are good, but I don't think that we shouldn't only be looking out for shares with the highest dividend yields (these usually don't last very long anyway). We have to look at the underlying profits of the business and see if the dividends that it pays are sustainable or if the company is able to generate a satisfactory return on its equity, which can justify the retention of earnings. But I do not think that there should be a preference for a dividend-yielding stock unless maybe you're retired and looking for a passive income flow, but even then, good opportunities for capital appreciation should not be avoided.

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Value Investing

You may be wondering what's with all this talk about value investing that many investors claim to be doing these days. This blog post is going to try and help you understand what is value investing and why you should practice it, as well as some examples that are not value investing.

This sums up the difference between value and price and its importance

(Image source: http://blog.wallstreetsurvivor.com/2013/08/29/the-basics-of-value-investing/)

Intrinsic Value - Discounted Cash Flow Model

This is the next part of calculating intrinsic value, where another way to value a share, the Discounted Cash Flow Model (DCF Model) will be introduced. This model is very similar to the Dividend Discount Model (linked to the post) and I would advise that you read the section on it before coming here to get a better understanding of some of the key terms as well as methods to calculate.

Intrinsic Value - Dividend Discount Model

This is a section which I thought I should add to the Understanding Financial Statements topic as after understanding the financial statements, the next thing that an investor would or should know is how to use this information to value businesses. Of course, there are also as many intrinsic values of businesses as there are people valuing the business as there is no hard and fast rule on intrisic value and the factors which have some of the greatest impact on calculation come from the perception of the investor, which can and will, vary from investor to investor.

This section will cover two popular methods, the Dividend Discount Model (DDM) and the Discounted Cash Flow Model (DCF Model). This has been split into 2 parts when writing as each model takes quite a lot of explanation as well as diagrams.