One morning while I was riding on the MRT train, I caught sight of a lady wearing a green tee-shirt with the following words printed on the back:
Whoever coined the phrase must be worldly-wise, though I suspect it is the nifty advertising slogan for some product brand.
Nonetheless, it triggered a wave of self-reflection within me. With the benefit of hindsight and maturity, what are the things I will do now, which I was hesitant about before?
Somehow, the stream of thoughts landed on the topic of investment. I recalled my experience as an investor over the past two decades. If I could travel back in time, I would like to teach my younger, rookie self about three things that are okay to do when it comes to investing.
These are the three lessons:
1. It is okay NOT to know everything about a company.
It is important to understand the financial health of a company before buying its stock. However, there ought to be a limit as to how much research one needs to do before arriving at an investment decision. If one insists on learning everything about a company first, information overload is bound to occur, which can cause analysis paralysis. Moreover, if you dig deep enough, confirmation bias will always lead you to find reasons to buy - or not buy - a stock.
Legendary investor Warren Buffett has advised us to only evaluate companies that are within our "circle of competence". Sadly, I am guilty of committing this transgression. I have invested in companies where I do not have complete knowledge and are beyond my expertise.
One example is Nanofilm Technologies International (Nanofilm). Nanofilm specializes in coating technologies. To be precise, they do Physical Vapour Deposition (PVD) and Filtered Cathodic Vacuum Arc (FCVA) coating. Nanofilm is also involved in nanofabrication as well as hydrogen energy solutions. Nanofilm is founded by ex-NTU professor Shi Xu, who is still the Executive Chairman of the company today. Even though I have an Engineering background, I have absolutely no idea how PVD and FCVA technologies work, what other competitor systems are out there, or how big the market size is. From this aspect alone, I should have kept a wide berth from this stock.
However, I have reviewed Nanofilm's financial results. The company has been able to generate a ROE above 10% over the past few years. Nanofilm has also maintained average gross margin above 40%. It is also in a net cash position. Hence, this is a stock that passes my screening criteria.
Granted, due to the slowdown in China's economy, Nanofilm has faced headwinds in its most recent financial year, which diminished its profitability. Thus, the stock has been brutually sold down by investors.
That said, nothing so far has caused me concern to change my investment decision. I believe the company is still in good shape and will be able to make it through the downswing before improving its earnings again.
So here is Lesson #1: I may not know everything about Nanofilm, but what I do know is good enough for me to decide on owning a stake in the company.
2. It is okay to cut loss and move on.
Historical data has shown that only a small group of super investors are able to achieve market-beating returns consistently year after year. For the rest of us, we are better off investing our money in low-cost ETFs and holding them till retirement.
So why do I still engage in active stock picking?
The main reason is because I enjoy the process of analysing a business. I like to find companies that are able to profit their shareholders handsomely over time.
Needless to say, I do not have a perfect track record of picking multi-baggers. There have been times when the original investment decision looks smart, but as circumstances change, the company is no longer attractive.
One example is SATS Limited (SATS). This company is no stranger to many Singaporeans. SATS provides aviation catering as well as gateway services at several international airports and Marina Bay Cruise Centre. SATS also deals in commercial catering and air cargo handling. If you have eaten a meal onboard Singapore Airlines, you would have eaten food prepared by SATS ground staff.
When I first invested in SATS, the company had very healthy margins and a low debt burden. Unfortunately, the COVID-19 pandemic grounded air travel to a halt and SATS suffered a massive loss during the period. The company had to retrench staff and withhold its dividend so as to conserve cash. These are understandable measures for the firm to survive through the crisis.
But when SATS acquired Worldwide Flight Services at a hefty price tag of 1.3 billion euros (S$1.9 billion), the company had to issue new shares and take on significant debt, which changed the financial health of the company. Despite the recovery in international air travel, SATS has yet to turn in a profit. With a heavier debt burden and inflationary costs eating into its margins, there is no guarantee how long SATS will take to return to the same level of profitability in its golden years.
The market is aware of SATS' predicament. The stock has been stuck in the $2+ range for some time now and has not been able to recover to the height of the $4+ range in the past.
When a company's situation has changed significantly, it is imperative to review whether your original investment rationale still holds. If it does not, then the stock should be sold.
In December last year, I sold my position in SATS at a loss. It was a painful decision, but I figured it is way better than having to pray continuously for the day when SATS can achieve positive shareholder return again.
So here is Lesson #2: When things have changed for the worse, don't dither and hope for a miracle. It is okay to cut loss on your investment and move on.
3. It is okay to be a lonely investor.
Singaporean investors are a dividend loving bunch, and S-Reits appeal to many people for their high yield. It is common to find fellow retail investors holding the same S-Reits in their portfolios.
On the other hand, our local small caps are not well covered by broker analysts and liquidity is low most of the time. If one has found a highly investible candidate, chances are nobody in your social circle knows about it, let alone holds it in their portfolio. Hence, there is no comfort of the masses to speak of.
Either one ends up as an astute investor when the price soars after market recognition of its hidden value, or one ends up as a fool for buying a dud that remains rangebound in price.
Given the above outcome, will you still consider investing in small caps? Will you still want to be a lonely investor?
For me, I have decided long ago to go on ahead and invest in the small caps anyway. This is why you will see a few lesser known entities in my portfolio. Even if the stock fails to garner public attention, as long as the company remains profitable and financially strong, and the management act with shareholders' interest in mind, I will gladly park my money in the stock.
And this is Lesson #3: Trust in your own analysis and buy the small cap stock. It is okay to be a lonely investor.
I hope you have found some food for thought from the three lessons above. I know my younger self would.
Thank you for reading.
"It is okay to pause and relax. The most productive thing you can do is to rest and rejuvenate yourself."
Whoever coined the phrase must be worldly-wise, though I suspect it is the nifty advertising slogan for some product brand.
Nonetheless, it triggered a wave of self-reflection within me. With the benefit of hindsight and maturity, what are the things I will do now, which I was hesitant about before?
Somehow, the stream of thoughts landed on the topic of investment. I recalled my experience as an investor over the past two decades. If I could travel back in time, I would like to teach my younger, rookie self about three things that are okay to do when it comes to investing.
These are the three lessons:
1. It is okay NOT to know everything about a company.
It is important to understand the financial health of a company before buying its stock. However, there ought to be a limit as to how much research one needs to do before arriving at an investment decision. If one insists on learning everything about a company first, information overload is bound to occur, which can cause analysis paralysis. Moreover, if you dig deep enough, confirmation bias will always lead you to find reasons to buy - or not buy - a stock.
Legendary investor Warren Buffett has advised us to only evaluate companies that are within our "circle of competence". Sadly, I am guilty of committing this transgression. I have invested in companies where I do not have complete knowledge and are beyond my expertise.
One example is Nanofilm Technologies International (Nanofilm). Nanofilm specializes in coating technologies. To be precise, they do Physical Vapour Deposition (PVD) and Filtered Cathodic Vacuum Arc (FCVA) coating. Nanofilm is also involved in nanofabrication as well as hydrogen energy solutions. Nanofilm is founded by ex-NTU professor Shi Xu, who is still the Executive Chairman of the company today. Even though I have an Engineering background, I have absolutely no idea how PVD and FCVA technologies work, what other competitor systems are out there, or how big the market size is. From this aspect alone, I should have kept a wide berth from this stock.
However, I have reviewed Nanofilm's financial results. The company has been able to generate a ROE above 10% over the past few years. Nanofilm has also maintained average gross margin above 40%. It is also in a net cash position. Hence, this is a stock that passes my screening criteria.
Granted, due to the slowdown in China's economy, Nanofilm has faced headwinds in its most recent financial year, which diminished its profitability. Thus, the stock has been brutually sold down by investors.
 |
| 1-year price chart of Nanofilm Technologies International. |
That said, nothing so far has caused me concern to change my investment decision. I believe the company is still in good shape and will be able to make it through the downswing before improving its earnings again.
So here is Lesson #1: I may not know everything about Nanofilm, but what I do know is good enough for me to decide on owning a stake in the company.
2. It is okay to cut loss and move on.
Historical data has shown that only a small group of super investors are able to achieve market-beating returns consistently year after year. For the rest of us, we are better off investing our money in low-cost ETFs and holding them till retirement.
So why do I still engage in active stock picking?
The main reason is because I enjoy the process of analysing a business. I like to find companies that are able to profit their shareholders handsomely over time.
Needless to say, I do not have a perfect track record of picking multi-baggers. There have been times when the original investment decision looks smart, but as circumstances change, the company is no longer attractive.
One example is SATS Limited (SATS). This company is no stranger to many Singaporeans. SATS provides aviation catering as well as gateway services at several international airports and Marina Bay Cruise Centre. SATS also deals in commercial catering and air cargo handling. If you have eaten a meal onboard Singapore Airlines, you would have eaten food prepared by SATS ground staff.
When I first invested in SATS, the company had very healthy margins and a low debt burden. Unfortunately, the COVID-19 pandemic grounded air travel to a halt and SATS suffered a massive loss during the period. The company had to retrench staff and withhold its dividend so as to conserve cash. These are understandable measures for the firm to survive through the crisis.
But when SATS acquired Worldwide Flight Services at a hefty price tag of 1.3 billion euros (S$1.9 billion), the company had to issue new shares and take on significant debt, which changed the financial health of the company. Despite the recovery in international air travel, SATS has yet to turn in a profit. With a heavier debt burden and inflationary costs eating into its margins, there is no guarantee how long SATS will take to return to the same level of profitability in its golden years.
The market is aware of SATS' predicament. The stock has been stuck in the $2+ range for some time now and has not been able to recover to the height of the $4+ range in the past.
 |
| 5-year price chart of SATS Limited. |
When a company's situation has changed significantly, it is imperative to review whether your original investment rationale still holds. If it does not, then the stock should be sold.
In December last year, I sold my position in SATS at a loss. It was a painful decision, but I figured it is way better than having to pray continuously for the day when SATS can achieve positive shareholder return again.
So here is Lesson #2: When things have changed for the worse, don't dither and hope for a miracle. It is okay to cut loss on your investment and move on.
3. It is okay to be a lonely investor.
Singaporean investors are a dividend loving bunch, and S-Reits appeal to many people for their high yield. It is common to find fellow retail investors holding the same S-Reits in their portfolios.
On the other hand, our local small caps are not well covered by broker analysts and liquidity is low most of the time. If one has found a highly investible candidate, chances are nobody in your social circle knows about it, let alone holds it in their portfolio. Hence, there is no comfort of the masses to speak of.
Either one ends up as an astute investor when the price soars after market recognition of its hidden value, or one ends up as a fool for buying a dud that remains rangebound in price.
Given the above outcome, will you still consider investing in small caps? Will you still want to be a lonely investor?
For me, I have decided long ago to go on ahead and invest in the small caps anyway. This is why you will see a few lesser known entities in my portfolio. Even if the stock fails to garner public attention, as long as the company remains profitable and financially strong, and the management act with shareholders' interest in mind, I will gladly park my money in the stock.
And this is Lesson #3: Trust in your own analysis and buy the small cap stock. It is okay to be a lonely investor.
I hope you have found some food for thought from the three lessons above. I know my younger self would.
Thank you for reading.
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