Saturday, November 27, 2021

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!

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