04 May 2011

Long Term Investment Applies to 'Good' 'Business' 'Company'

Over a period of investment, I met with different types of friends. We are all searching for a Low Risk yet High Return investment which is in contrast with the classic 'Modern Portfolio Theory' written by Harry Markowitz.

Some are learning Technical Analysis. A number of theories have been developed in term of the searching of a good stock which has a upward movement or downward movement which they can predict and make use of. However, the cons of this analysis is you are hard to master it and there is still a risk involved which encourage you to 'Cut Lost' if the wind turns another way round.

Some are learning Fundamental Analysis. CFA is a good post graduation course allowing you to learn how to perform fundamental analysis from Global, Sector, and Industry to specific company by annual report. However, there is too many manipulation from the company which hinders you from making a great profit. Instead, some of the companies are trying to cheat the investors by creating a better outlook. So, which one is the best strategy to beat the overall market while enjoying lower risk?

In my previous post Margin of Safety, First thing in Investment, I always emphasize the margin of safety. One of the way we can find out the margin of safety is through searching a
good company operates in a good industry and invest it in a good time.

While we try not to time the investment as we can reduce the timing risk by 'Dollar Cost Averaging', I always search for a well managed company in a good industry. ROE (a.k.a Returns On Equity) is the most important key performance indicator which I judge a good company compared against its peers. However, we also must look at its optimal corporate finance structure so that we can know the optimal debt levels it can operates at.

If you want to stay investing in long term, try to find out a good industry too. There is different industry performance in different countries. While Singapore is performing excellently in finance industry, Malaysia is good at the Agriculture & plantation and Islamic Finance. Of course, there are some industries which is less reflect during recession period such consumer industry as well as low cost leadership companies.

If you a serious investor, try to do your homework before invest in any company. Try to make the investment like invest in a business which you think it is the best company you can ever invest in. Of course, some diversification will allow you to sleep well without having worry too much in particular stock.

Long term investment does not necessarily means you have to hold the company for more than 10 years. However, this concept will keep you in mind that while investing a longer period of time in a good business company, you will enjoy a better returns as compared to other lower risk investment such as Fix Deposit, as the more homework and steadiness you performs, the better result you will get. In long run.

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