Key Learning from Millennial Money

I find this an undervalue book and thank God it pops up in front of me in the bookstore.

Once you have set the investing strategy, stay with it. Don't switch to a new one just because the original one has not work for the last year or two.

Value over Growth: Low EV to FCF, low Price to Cash Flow, Low Price to Earnings, Low Price to Sales, low EV to EBITDA

Quality over Junk: High ROIC, high ROA, high ROE, high Interest coverage

Follow the Trend: High six month momentum, high nine month momentum, low volatility

Follow the Leaders: High stakeholder yield, high shareholder yield, high dividend yield, high buybacks

In the book, it teaches you the right mindset which is to have a long term investing strategy. Do not let emotions dictate you during the both market extremes of Greed and Fear. Stay invested in all circumstances. I have managed to invest during the Greece crisis and Chinese stock crisis but I failed to continue my average down of OCBC. I was buying OCBC in large amount during 2015 (if I recall correctly) from $9 to around $10.4+. When the trend turn, I did not exit but continue to buy more at $8+. However, I did not buy more when it dropped to $7+. I switched out when the price recovered to $9+ and in 2017 July is $10+. Sometimes, it is better not to do anything. During the oil crisis, I was too terrified by Swiber and Ezra, I failed to buy McDermott when it dropped to $4. All these are real fear, you do not know when is the lowest and you are afraid to throw good money at the bad ones.  

Apart from rules based investment strategy, you need to evaluate the business model and whether the business has Moats. I was discussing Foot Locker with my mentor and he felt that this company does not have economic moat and it is like a distributor business model. He will rather buy Hour Glass, at least the assets are ROLEX and other branded watches. Hence, I will recommend to use Moats, SWOT analysis and understand business positioning other than looking at the financial numbers.

Investing is fun and it requires a holistic approach to acquire strong businesses for your better future! 

Moats in Investing

Keeping Competitors Out

Warren Buffett says," A truly great business must have an enduring "moat" that protects excellent returns on invested capital.

A company needs to do something very well in order to grow their business profitably. A moat protects a business from its competitors. It is a durable competitive advantage which keeps competitors away from the company's customers. Pat Dorsey who used to head the Morningstar is a firm advocate of moat, he feels that it is better to pay more for something which is more durable from appliances to cars to houses, items which last longer will be more expensive. The same theory applies to stock investing.

Branding

Branding is one of the most important aspects of any business, large or small, retail or B2B. An effective brand strategy gives you a major edge in increasingly competitive markets. Branding helps to build mind shares in consumers which is defined as the amount of space the company occupies in customers' minds. Tiffany has a moat. People pay alot for the box when the jewelry will be cheaper somewhere else. Coca Cola has a strong branding, the brand value in 2015 is said to be worth $83.84 billion.

Cost a lot to switch

There is not much of a competitive advantage bank has over others, their products are similar. With internet banking, branch locations has lesser impact than before. However, consumers tend to stay with one bank for average six to seven years as it is troublesome to change banks. When switching cost is high, there is a moat. Previously, iphone users would not use android phones as it was difficult to copy their contact list over to other phone and the apps are different. That was a moat. However, with more intelligent phones entering the market, the moat of iphone is slowing eroded.

Network Effects

The more users of the product, the more they will enjoy the network effects. Think Facebook, Twitter and Youtube. It is very difficult for competitors to penetrate a network moat.

Low Cost Producers & Sheer Size

Walmart has a moat. With economies of scale, Walmart can sell its products cheaper than competitors, ask for longer credit terms from suppliers which improves the cashflow while getting paid immediately from the customers. Larger companies can cement their advantages and sustain returns for longer by been more efficient in SG&A than smaller companies.

Erosion of moat

Moat is not permanent, competitors will figure out a way to acquire market shares and erode the competitive advantage. Industry stability is another factor in determining the durability of the moat. Stable industries can create sustainable value creation whereas unstable industries present substantial competitive challenges and opportunities.

Conclusion

You need to look for companies with consistent strong growth of net profit margin, this will indicate that the company has a moat. Then you need to consider what sort of competitive advantage it has and how its competitors can erode this. You can also consider the entire supply chain and where the profits flow to. This will reinforce whether the company has true moat.