Lessons learnt in my first year of investing

 I've hit a bit of a busy patch and don't have enough time to flesh out more "how to invest" posts.

So, instead, I shall be writing about the lessons I learned in my first year of investing.

There are 3 things that really stand out to me, looking back now:

1. History always repeats itself

When you were growing up, do you remember when you first faced a problem you've never encountered or read about, seen something you've never imagined possible, or heard a voice/sound you never thought could exist? Yeah well, now that you are older, you would have realised it is just another thing or something you just have not experienced.

For me, the first time I became aware of this concept was when I was getting over being dumped or being rejected; which was it I cannot remember anymore - it seemed either one was a world ending experience; ah the naivete of adolescence hehe. I thought I'd never again meet someone who was special, or made me feel like there are singular things in the world worth taking a chance for at the risk of falling, or made me not to focus on just myself but to look around and see who else I can be of help to. Anyway, this cycle happened more than a few times and at one point, I just realised there is no the one perfect, match made in heaven Disney-esque person for you. At the core of it, we are all just apes who (or which?) have advanced in a few aspects of existence, looking for apes of similar values, and ideals to make more apes. But I gotta tell you, as an ape meeting another ape which shares the same values and ideals comes pretty close to finding that Disney princess. Ok, I side tracked but the point I wanted to make is that falling in love and out of love is just another part of history, albeit your history, that repeats itself, manifesting in different people who come and go in your live.

Looking at this in parallel with the financial markets, take the various crises that have happened during the last 20 years or so. The few of the top of my head are the Covid-19 crash in March 2020, European debt crises in the 2010s [I remembered I was working as a fund accountant, and many a european funds had to spin off (I'm pretty sure this isn't the right term but wtv -lah) their greek bonds in favor of new ones with revised terms and amounts - quite a tense moment and one where I thought the EU was surely kick Greece out - well luckily they didn't and Greece is still in the EU, albeit not doing very well], the global financial crisis in 2008 linked to the US subprime mortgage default [ This was particularly memorable because it was my first finance lecture of my first day in university - talk about setting the tone!] , the 2000 dotcom boom and spectacular bust, and the Asian financial crises of 1997.

In each of these events of varying severity, some people said the end of the world was imminent, some didn't care, some made preparations by going off grid, some pursued religion as a means to escape the clutches of crooked capitalism, and so on. In the end, like Newton's 3rd law of motion, for every action, there is an equal action in the opposite reaction. Or, if you like, the law of reversion to the mean will always ensure things don't go the extreme and that humans (at least most of us) will be able to survive and thrive.

 So, in short, bad things, good things, these things will always repeat in some form and degree, well into the future, long after you and I are gone. I guess that's why there's that saying, you are doomed to repeat history should you fail to learn from it.

2. Invest with your head, not your heart 

It is REAL easy to be tempted and swayed by the opinions of others when it comes to stocks especially if you do not have a framework to operate from i.e. why should you invest in company X, what do you know about it's business and industry, who and what will affect its future prospects, who runs the company, do you know enough or can you learn up about the company/industry with not too much trouble?

At least for me, even now, when I read a particularly good stock sharing or due diligence by someone else, I somethings think, "Yes, this might be a winner" - even without knowing a thing about the company, much less the answers to any one of the questions above. I believe, it is something in the human nature to want to believe in the possibility of success or may be it's just me ; I think I might be too optimistic a lot of times (yellow lights at 400m away? I can make it in time!).

There are upsides to being optimistic and trusting your gut at times, but in investing, trusting your head and letting it lead your gut will save you many a headache, heartache, insomnia, and mental anguish. The share market after all, is an emotionless machine - it is a machine that, in the words of my mentor, "acts a voting machine in the short term, and a weighing machine in the long term" . It does not know you own the stock and is not obligated to give you the returns you picture or fantasize in your head. Facts and numbers are infallible, but not investor sentiment. If you invest based on feelings, you will get heartbroken.

3. Do the work, don't just digest

It will do you good, a lifetime of good in fact, if you don't take things at face value but always do your own due diligence. It is one thing to just accept whatever info someone tells you, but actually going out to do the research, read up and learn all you can about a company gives you a conviction and knowledge that no one can take away from you. It gives you an understanding which people cannot bullshit through and which you can tell someone to get the fuck out coz you know your shit.

This leads me to: never be suckered into doing something just because everyone is else is doing it. Ever had the experience where you know you're right about something but everyone, from your friends, family to your 2 dogs, are convinced you are wrong? Yeah, you are gonna feel that quite a fair bit. But if you done your homework and you have the conviction - conviction from fleshing out your investment statement and making sure it fits the facts (not the other way round) - well prepare for massive vindication.

4. Do not be greedy, 

This one sorta ties in with point 2 but it bears mentioning to never be greedy! Especially today, it is so easy to obtain margin financing i.e. borrowing money to buy shares. Borrowing money to buy shares works both ways - you get to buy more shares with borrowed money and you get to enjoy higher returns when the markets go up. Conversely, when the market goes down, you also get to enjoy the greater amount of losses (yes I said enjoy, I am a sucker for pain). 

Lose too much, and you may end up losing more than what you can afford to. You may argue you can keep track and limit your borrowing. To that I say, kudos but why subject yourself to such pressure? One wrong miscalculation and you risk losing your car, house, or livelihood - this is especially crucial if you have kids/married, are you willing to stake the future of your marriage/spouse/dependents because you feel confident? Many a great man/women have fallen prey to overconfidence clothed in the guise of tempered confidence.

After all, you just want to multiply your gains no? Other than borrowing, there is the traditional method of just letting your money compound over time in the share market, and choosing great companies to grow them - it's not as exciting as using leverage, but it is a hell lot easier on your mental health than worrying if your margin account is enough during a correction. 

Why am I doing this - writing about investing

The purpose of writing, sharing and producing content about investing is because I see this as THE ticket to financial freedom. And I believe there is an abundance of wealth enough for everyone in this world; investing is not a zero sum game - everyone can win at this game! It is also not an esoteric game which only a select few can play and win; anyone and everyone with internet access has an equal opportunity to make his/her gains in the stock market. So, I believe this is worth sharing with the world, and this is how I would like to leave a mark on the world and leave it better than I found it. 

What is financial freedom? My belief is financial freedom is being able to do whatever you want in life without worrying about your finances; you should be able to work because it excites you by giving you a sense of purpose and that you are making a difference in the world or in other people's life, preferably in a positive way! My belief is you shouldn't work just because you need a paycheck and because of that paycheck, may end up compromising your values and relationships. 

The phrase money isn't everything but it is alot of things is certainly true, and we should always bear in mind to achieve power and control over money, and not the other way round.

For me, investing is really about making calculated bets now and reaping the benefits in the future. As long as you have time, the right mindset and the right framework, you can go far and deep - don't be fooled by the get rich quick methods ; nothing is free in life and this is also true for investing, you need to put in the effort to learn how to invest (or if you don't want to, you put in your money with a fund manager) and over here, I shall attempt to give you what I have in my toolbox, skill set, and mind set. ✌️

 

How to invest - part 1. Preparation - What (Part 2)

So continuing with part 1, Preparation. 

First, you identify a company you like. How? Through what Warren buffett calls your circle of competence or Peter Lynch will say an edge you have in the business or profession you're in. Whoever you follow, it really means based on you knowledge, expertise, skills and experience, what is a company or industry which you have a good understanding about and if no, is it something that feels intuitive and easy to grasp/gain knowledge about?

Contrary to what you might have been led to believe, investing need not be an exercise where you need to put your money in things like high tech industries, companies that have solved the world-hunger problem, or even the next Facebook.

Instead, it pays to look around you and be aware of the things you use daily or interact with - chances are you would be using Netflix, have been doing Zoom meetings, paid for stuff using your Visa card, bought something on eBay and used PayPal, or have even made plans to travel and booked a place to stay with Airbnb. All of these are listed companies and because you used them before, you know: what's good about these services and what can be better, what are the alternatives if you don't wanna use them, are these companies constantly improving their products, are their services overpriced, can you live without using them? I bet you innately know the answers to these answers as you use them for awhile. 

So, that's about finding a company worth checking out. Candidates are everywhere around you; you just gotta, as a mentor once said, ask yourself : "Is this company that makes or provides this service, listed?" 

Chances are you'll find many a gem which others might not even realize, let alone wall street. 

I know I've back tracked from researching about a company and I shall get back to it. 

So, you found a company you taken a keen towards. Now you've looked it up on YouTube and there are vids about the stock; what does the business do to make money, it's growth prospects, it's economic moats,the external factors which may work in favor or against its growth, and so on. 

At this point, what you really want is to get a feel for the company and I find these questions help to do just that:

What does this company do to provide value to its customers? 

What is the company doing right that translates into more revenue, more profits, more cash flow and ever growing market cap? 

What needs to happen in the future, for the company to continue growing? What would cause the opposite to happen?

So, an example of this is something that goes like this; I'm using a company I invested in, Pagerduty. 

What does this company do to provide value to its customers? 

Pagerduty provides companies with the ability to identify issues as they occur and sometimes before they even happen. Say, there's a part of a website that's down eg payment gateway, or a slowdown in a particular section of operations. This adds value because companies can quickly identify and fix problems before/as soon as they happen and the user experience is uninterrupted, which translates into a good user experience and when a user has a good experience, the user will tend to continue using the service. 

What is the company doing right that translates into more revenue, more profits, more cash flow and ever growing market cap? 

They have been:

1. Investing in R&D to further develop their services with their most recent service utilizing AI,big data and machine learning to automate most of the routine stuff which improves their service delivery speed and pre-empt events/issues before they occur.

2. Increasing their marketing spend to raise awareness eg pagerduty summit

3. Doing partnerships sales or having their clients introducing them to their other clients.

What needs to happen in the future, for the company to continue growing? What would cause the opposite to happen?

In the future, as long as the world continues to be more digitalised, and companies continue to have as much of their operations online vs offline, the need for Pagerduty's service will continue to be of value. The covid thing in 2020 proved to be an opportune time for pagerduty as many if not all companies around the globe were forced to bring their operations online and doing something like that at scale will inevitably cause issues in operations, logistics, IT, finance and wtv else that a company needs to exist. Having pagerduty able to identify, highlight and get the right people to the right issues was and still is crucial in ensuring businesses can continue to exist and provide products and services of value to customers.

What would cause the opposite to happen is if Pagerduty does not keep innovating their services and cuts down on their marketing spend to develop their brand awareness as there are other companies in the same line of business which are also constantly developing and trying to get ahead. 

To get that, I watched YouTube videos and also read the quarterly and annual reports, as well as listened/read their quarterly earnings call; which I will cover next. 

It takes some time at first but as with most things in life, it only gets easier  with time and repetition!

How to invest - part 1. Preparation - What (Part 1)

Background 

My framework of investing is by no means novel or something groundbreaking. In fact, it is an amalgamation of what I have picked up, learned from, mentored by, and crucially, blessed enough to do the actual investing and failing well, so that I can learn from and get better. 

The concepts I accepted as info and is now my knowledge, can also be your knowledge too. If I can, you can too. Rather, if you want to, you can too. Don't let the inner and outside voices talk you out of what you feel and believe to be true for you. It is your life ans you only have one life. Live it to the best that you can without bringing hurt to others - my moto anyway hehe. 

Right, my investing way is something I would call The Fisherman. Why? Because like preparing to go fish, you do the bulk of the work in the beginning, relax during most of the time and only do or two things when the fish takes the bait. 

So, we can break it down into 3 parts:

A. Preparation 

B. Relaxation

C. Catch

Preparation, as the name implies, involves doing the groundwork and homework about the company you want to invest in. 

In fishing, before we head out to the pier, we'll go get bait, prepare the rods and hooks, get the chairs, some snacks and pack in something to pass the time while waiting for the fish to take the bait. 

In investing, before we even think about what price to pay, the first thing we gotta do is find out what the company does to make money - what products does it sell or what service does it provide and what is unique about it, what does it do which it's competitors do not, what does it have that its competitors do not. 

The goal here, is to form an investing statement which will act as the fishing rod. The investing statement should detail what does this company do that is special to you which makes you believe in it, and if you believe (you should be, after all) this company has a bright future ahead, why so and what would cause that future to not materialize ?

To do this, first hit up YouTube for vids/explainers about the company.  Chances are someone would have covered this great opportunity of yours. Don't fret that potentially many other investors would be in the know about this company you have taken a liking to. It is not the knowledge that makes you money but what you do with it!

To be Continued..

One up on Wall Street - reflections

One of the more recent investing books I've read is Peter Lynch's One up On Wall Street.

The central theme of his book is that retail investors like you and me have an edge vs Wall Street and all its analysts and institutions. Of course, he ran a successful mutual fund between the late 60s to early 90s and has reservoir of experience to draw and reflect on.

So, one thing a retail investor has is being able to see/use/hear/feel/touch a product/service wayyy before wall street  catches a whiff of it - a stock which wall st would consider attractive is one where there are a number of institutional holdings as well as it being covered by analysts in wall st. So, you have time on your side when you spot a new company that does this new thing or makes this new device that you just tried out and thought hey that's good value for money; wall street would have waited on an analyst or twenty to come up with an expose before it makes its round among the street's institutions.

There is also, as Peter puts it, an idea that being successful is one thing but it's important not to look bad if you fail. Sound familiar? I mean, if you have experience dealing with a broker or a personal banker or have had invested in unit trusts/mutual funds, chances are you would have been 'stock-splained' by your agent/consultant/advisor/relationship manager that the lackluster performance of your holdings are due to XXX scenario or a 'macroeconomic tailwind' caused by unexpected breakdowns in high level intranational negotiations over the trade pact for the coming 2 fiscal quarters, or there has been an unexpected movement of the market sentiment which caused the performance of your fund to perform at a level we would like to see improve in the next quarter; in short someone messed up but no one wants to be seen to be the cause of that. The net effect is that fund managers will more likely play it safe or sandbag their results (if at all possible), rather than go heavy in a new company with solid fundamentals and is still in the beginning stages of its growth. Coz, it's better to show your fund managed to return 7% this year than have the story of the fund only returned 3% this year because it managed to get a hold of opportunities which will unfold and blossom over the next 5 years.

Other than that, I suppose being in wall st, a fund manager would be burdened with many unnecessaries which you and I definitely do not have or dreamt would have like an overbearing supervisor who may not understand the stocks/securities you select, do not possess the same skills to analyse them and worst, comes to the job with preconceived ideas and  ill-suited mindset to investing. All of which would serve to frustrate and more often that not, cause you to select stocks which may not be in the best interest of the fund holders. That, and you would have to contend with having to explain to your colleagues why are you buying this and not that, and why at this price and why not at 20% lower; it's good and probably essential that you can explain why you want to buy a stock but if you gotta explain and justify to every other person who happens to share the same office with you, well it can get tiresome, bothersome, and then some.

  

No Fluff 3 - Balance Sheet - Debt again

As a continuation from the previous post, less debt is always good but there are exceptions though; two which come to mind is a low interest rate environment and where a company has a large cash position or strong cashflow.

A low interest rate environment means bank loans are cheap-er than what it would cost during times when the economy is up and running at a brisk pace i.e. during the height of expansion or at the peak of an economic cycle. 

When the economy is up, spending is up, lending is up, trickle down economics is working its magic, inflation also starts to creep up - the impact of this is that your goods and services will also increase in price. Sometimes fast, sometimes not so fast but there will be an increase.

This will then (in most cases) lead to an interest hike by the country's federal reserve or bank negara for us in Malaysia. This should then stem inflation. How?

By increasing interest rates, loans will be costlier for people and companies so there will be less borrowings and consequently less money circulating in the economy. Concurrently, savings rates will also increase and this will spur people to place more money into FD or money markets too; which also results in less money circulating in the economy. The result of this is to ultimately decrease the amount of money moving about in the economy ie everyone will be cutting down on spending, which in turn causes prices of goods and services to also decrease, and this will result in a lower rate of inflation. In effect, it's abit like putting the brakes on the economy coz you are slowing its growth.

Inversely, in an environment created by high interest rates (well there are other stuff like decreased money supply), economic growth is stifled and inflation is growing slowly. So, to put the pedal to the metal, economy wise, governments will do the exact opposite and lower interest rates. This means money becomes cheaper to borrow, companies will start borrowing to create businesses and enterprises, and people get to spend stuff to get more stuff so that the stuff that was previously there can be upgraded with newer stuff or to replace the old stuff with the new, it just translates into money circulating about in the economy.

So, how does this tie in with the low interest rate environment and it being a good idea for companies to borrow money? So, first let me paint a picture for you - you are a company with good prospects, you have growing revenue on an annual basis, your net income is also growing by the quarter, your customer base is growing and also diversifying; in short, you are doing well even being able to weather the hell that has rained down on you over the last 2 covid years. Now, bear in mind, you were able to do well during a period when things were looking like it's gonna be over and now, faced with the possibility of reaching greater heights by taking up a loan that's gonna cost you what 2% per annum, would you do it? Bear in mind a million dollars term loan @ 2% with 10 years only ends up costing about 9K-ish a month - sounds like if you can make at least 9K a month, that sounds like something worth thinking about . Of course, you are a company so that number should be scaled up accordingly and you can of course negotiate different payment terms and schedules.

The point is, for a good company, taking up a loan with low interest rates seems to be an attractive proposition since the the cost of interest is outweighed by the benefits of having more cash; whether to weather unexpected disruptions in your cash collection cycle, have an extra buffer for some rough months ahead (especially so for cyclical businesses, or to increase your marketing spend especially now that covid has sort of levelled the playing field for everyone. 

I see a quite a few companies do this especially those with a SAAS business model. These type of companies usually have good revenue growth and more importantly, and also to the next point, have strong cashflow generating ability/sitting on huge cash piles. 

SAAS companies, as the name implies, provides a service on a subscription bases, so they collect money upfront and provide a service. There are so many wonderful things about the saas model and the ability to generate good cashflow is one of them.

Since you (the SAAS company) collect money upfront, automatically that's your cashflow right there - how much of that translates into free cashflow is another thing that determines the quality of the company and we shall talk about that next time - and having cash means you can execute right away; you can pay right away and make things happen. In the context of this discussion, it means you have a great ability to cover your interest payments.

It's the same as having a large amount of cash - you can afford to service the interest payments while you continue to make revenue->profits->cashflow or have enough of a buffer to sort out your business while still being able to meet the debt covenant. Although, having a strong cashflow is definitely preferable to just having a lot of cash.

No Fluff 2 - Balance sheet - Debt

 Hello again!

Apologies to the 2 people following this blog, I had been doing quite a bit of marie kondo in my life the last couple of months.

Anyway, today I shall be writing about the balance sheet of companies I invest in.

At a minimum, I prefer companies with little or no debt and I like to reference the debt to equity ratio here as a guideline - a company with 0 is stellar, between 0 and 0.5 is alright, 0.5-1.0 warrants a real understanding of the type of debt it has and regular monitoring to see if it can control it. Above 1.0, well I'd say you're living life in the fast lane.

Now, I have nothing against debt - I mean, a credit card is the most common and useful debt in our daily lives. You, literally on your phone now, can buy just about anything in the world with the swipe of your thumbprint. You use it for both needs and wants, well most of it anyway. You swipe/charge it to your credit card and (hopefully) settle the balances in full when the bill comes. But what if you don't settle in full? well, you make the minimum monthly payments and the banks will OK your account; you can continue spending as long as you meet that minimum amount every month (there's of course a whole bunch of reasons to avoid the minimum amount but that's for another time). What if you get a little behind in payments? Well then, the banks charge you a late fee and also make a note of this in CCRIS/CTOS. Get a little behind too much and you run the risk of card cancellation, getting into default, getting hit with legal action by the bank, getting blacklisted and not being able to travel out of the country - talk about a fast escalation.

Now, think of the parallels between the credit card in your life and debt in a company:

A company with money financed by debt can expand quickly, by building up factories/plants/production capabilities at scale, marketing, building a brand and selling to more customers around the globe eg you on the phone with your thumb, ready to scan hehe. If it works out well, great - the profits can cover the interests and repay the principal. If it doesn't, well that's the tricky bit since a company usually has what is called a debt covenant with its lenders and most of the time, paying interest and principal repayments according to the schedule is something that forms part of the covenant. So, whether you're making money or not, you gotta make those payments regularly. Failure to do so, well same like the last bit with a credit card, you run the risk of getting into default, getting hit with legal action by the bank, getting delisted, having to sell everything in the company to pay the banks and whoever else the company might have owed money to. 

Like Peter Lynch said, a company without debt would have to do something deserving of a distinguished award to go out of business. And if you think about it, you can always negotiate a way to defer expenses and payments to your various suppliers like utilities, wages, insurance, and so on, because, you can always reason if you go out of business you can't pay them anyway so it's in everyone's interest that you defer that payment for future income so all the players in the game gets paid. Banks on the other hand.. and by banks, I mean creditors and banks but really, it is whoever loaned you money; if they will it, they'll take you to court in the event of a default and you wind up liquidating everything to pay them. So again, debt, like visceral fat, can be a real killer.

Nowhere else in my adult life have I seen and understood the phrase, "Only when the tide goes out do you discover who's been swimming naked" than in the last 2 years. During the first few months of the lockdown in Malaysia back in 2020, many companies shuttered, with hotels being the stellar (well, terribly stellar)  example of this - many a hotel, whether boutique, break and breakfast, inns, even the large multinational ones closed shop, never to be resurrected again. All this in the span of like what, 3 months?

So, in short, less debt is always best. Although, there are always exceptions to a rule; like when interest rates are as low as baggy pants were in the 2000s in the sub 2% or if the company has large amounts of cash or a strong cashflow.