Bangkok--2 Nov--Marketing Communications Thailand
'Buyer beware' is ancient consumer advice, so old that the Latin 'caveat emptor' is still used today. No words ring more true for investors: if you buy a stock and it falls in value you cannot ask for your money back.
At Aberdeen, our approach to investing is guided by common sense. Unless you understand the basics of what makes a company tick – such as its cash flow and debt – you cannot value it. And if you don't know how much a company is worth, you won't know how much to pay for its shares.
Our starting point is always the annual report. It will answer basic questions about what the company does, its suppliers and customers, source of competitive advantage and how it makes money. You shouldn't need to be an expert to understand the answers.
While any product knowledge is useful, far more important is a grasp of the overall manufacturing process and industry behaviour. For example, it would have been of no great use to understand film if you didn't also see the advent of digital cameras. Kodak didn't and it went bankrupt.
Our preference is always for simple businesses because they are easier to understand. In Asia, we are attracted to the consumer area, from retailers to property, as well as construction or infrastructure proxies (such as cement makers). These are all sectors that stand to gain from growing wealth.
Simple businesses can have their weaknesses, of course. When a sector has low barriers to entry, competitors can quickly appear and erode profit margins. That's why Warren Buffett likes to buy companies that are simple but also have strong 'economic moats' – his euphemism for protection from competition, through monopoly or otherwise.
Such companies have more stable and predictable earnings. Power or water utilities are natural monopolies because they are a public good and infrastructure is costly. While telecom monopolies have been dismantled almost everywhere there is rarely room for more than a few players in any single market.
When there are a handful of competitors in any market there is often the potential for regulatory capture. This is when businesses know more about their market than the regulator and can use this to agree tariff and other payments that under-price the true costs and/or potential profits. This can be good for investors, if not so good for consumers.
Sure, some investors may find 'simple' too boring. They want the next new thing – online gaming, space travel and ostrich farms have all had their moment in the sun. But a craving for novelty can be a trap for the unwary. If something seems too good to be true, it usually is: the tech bubble was like that.
We prefer businesses that have real products, real services and actual customers. Staples – makers of products for which demand is fairly constant – are easier to make sense of than cyclical businesses, for which demand is more discretionary.
Try to resist being over-confident and keep personal experience in perspective. The brands you may shop for are notoriously fickle as investments. That 'it' bag you liked one year will be in the back of the cupboard the next.
So let common sense be your best guide. Understand pricing power. The reward will not only be to avoid stock market slip-ups but to find hidden value. The stock market may notionally be efficient, but good companies can be unfairly coloured by events or the behaviour of a rival.
Occasionally a company may be in the throes of change or have a business that is unique, which no one has really penetrated. Sometimes this can be an argument in favour of investing in complex companies, or messy structures like conglomerates, where the parts aren't reflected in the value of the whole.
A good example is MTR Corp, which owns and operates Hong Kong's metro – used by over 5.4 million people every week-day. A few years ago we were doing our analysis pre-IPO and realised that it had a significant property portfolio above its stations. The commercial potential of this footfall was huge but the market hadn't realised this.
The stock proved a very good investment.
Find out more at www.aberdeen-asset.co.th/10GoldenRules
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