Value Stocks - a different perspective in trying times

Reading through the forums, it is clear that many "investors" rely heavily on market rumours, often uninformed advice from friends & family or even total strangers for advice as to which stocks to pick. One question that should perhaps be asked is that would you take advice from such sources in deciding who to marry, what degree to take, or indeed any other major decision in your life? After all, whilst money doesn't indeed buy happiness, it sure goes a long way towards helping one get on with life - a wrong decision could set you back many years in terms of retirement planning, planning a family or even taking a holiday. If not, then perhaps sourcing your next "hot pick" from such people might not be such a great thing after all.

So what next? Many people are not familiar with financial statements - a course I once attended on basic accounting for non-accounting managers was an eye-opener. Senior professionals were at a loss when it came to understanding simple debit/credit, let alone P&L statements and Balance Sheets. Couple that with the fact that we are not industry experts and do not have access to company officials like Warren Buffet for example does, what chance indeed has the man on the street.

To begin with, we are to a smaller or larger extent equipped with "common sense" (if only common sense were so common!). Just like Warren Buffet, look to companies who produce products that you understand. Then do a little crystal ball gazing and see if the product or service is one that is both sustainable and one in which the company in question has some definable advantage in, compared to its peers in the industry. Then see what threats (or opportunities) there are in the marketplace that will erode (or enhance) the company's business over time. Now you have a simple basis by which to evaluate a company from a long term value perspective.

Still ignoring the specific financials, as yourself if the company and its industry is growing, maturing or declining. Look next to the overall economy (local and/or global - depending on the company's "playing field") - this determines the the "best" time to enter (if you are a long term investor, there may be no "best time to enter" - rather it would be a progressive accumulation.

Next, is the company tightly held (and thereby illiquid and subject to manipulation), has it got a good (and sustainable) management, and what is its reputation like.

The above "measures" are purely qualitative and serve to mainly act as a form of a sanity check. These can be done independently of analyst reports, market rumours, etc and should provide a fairly firm foundation even in the absence of financial analysis.

Don't forget - even stock analysts are prone to hype and just like any other person are susceptible to hype and white-washing (for eg take the case of Ferro China, just to mention one). A study of top analysts on Wall Street sometime back revealed that more than half the top analysts at the time did not even know how to read a simple P&L and Balance Sheet!

So is all the above just plain common sense? Yes. And yet too much money has been lost on hype that many of us do not understand but gamble on to this date - the dot com bust, structured investment products and even penny stocks which should have been allowed to die a natural death years ago.

Happy investing~!