Personal Quip: Encoding

It's a given fact. If you're analyzing a potential investment, you need pertinent information. If it's qualitative, you need to know some tidbits on the industry and the business character, as determined by the biz model and the management. If it's quantitative, you need the financial statements and other relevant data such as sales volume and operational KPI's.

My biggest complaint on analysis is the unnecessary amount of time I spend ENCODING all the data into either MS Word or MS Excel. That's right! ENCODING.

Once encoded, the fun begins: I can finally play around with the numbers and fiddle with them how much as I place. That's the entire point. When it comes to the financial statements, I normally break down most items I find relevant, and shelve off to another worksheet data such as movement of ADA, sales volume, operational KPIs, and rollforward analyses of PPE and accum. depreciation, for me to peruse when the time comes.

I don't think I've ever seen Value Line or S&P500 do this with their reports on a company, but that's not saying other KPO (knowledge process outsourcing) companies do something similar to what I look at. After all, I've never seen the products offered by the likes of FACTSET and Thomson Reuters. (Note to self: public KPOs, if there are any, may actually be good investments - everyone's using them since nobody's got the damn time to do the encoding themselves!)

The idea is to play around with the numbers and find literally everything about the company. It's like gathering all the data first before sifting through all of 'em, one by one, wading through the useless garbage as you search for the diamonds, i.e. information that give glaring revelations on the first five elements of analysis: ability to pay debt, profitability, operational efficiency, adequate returns, and inherent stability (quantitative side).

It's even more problematic when you want at least 7 years' worth of encoding. You need to fix the balance sheet / income statement items. You need to fix up what you wanna see from the statement of cash flows, all for the sake of accuracy in your fact-finding. Never mind the risk that whatever number you're taking has been "managed" by the upper echelons of the corporate governance hierarchy.



And then there's the report making. Analysis is fun. I'm not joking here. Analyzing the company to find the information you need, to see if it's worth putting your money in based on a desired rate of return and one's margin of safety (in case you were wrong, your valuations were actually invalid or highly inaccurate thanks to the company's "earnings management" techniques that you didn't bother cross-checking, or something unexpected drags the prices down), can be sweet. Unfortunately, I believe that if you just leave it all in an MS Excel file for you to read, you encounter two problems:

1. You can't possibly remember your findings after you've left your analysis files for about a quarter or two, unless you've got an awesome memory or you've been OC enough to actually check it every week at the least.
2. If you're looking for a job as an analyst on the professional level (which can lead to wonderful careers such as portfolio managers, CFA's with financial management responsibilities, or... whatever else I missed), what's your proof you did some analytical work? All you did was crunch numbers and gather information but you didn't package it in a credible form for YOU to remember and for YOU to show it off to potential employers!

Report making sucks. But it's definitely not as boring and tedious as encoding... Unfortunately for me, when it comes to making reports, laziness and procrastination kicks in.

Investment Strategy

You need two things when you're planning on investing your money in vehicles beyond the scope of banking. One, the willingness to accept the possibility of your money dropping into the oblivion called ZERO. Two, a strategy, and that means knowing what you're getting into. That goes for both the investment vehicle you're considering AND the one you will eventually choose to ride.

Otherwise, you're either an idiot or a gambler. Unfortunately, the market has plenty of both. If it didn't, value investors who made it big like Warren Buffett (or his classmates from that class in Columbia Business School long ago...) wouldn't exist.

To properly invest, you need:

1. THE KNOWLEDGE. You have to know what you're getting into. When buying a car, it's due diligence to look at the contract, the payment scheme, insurance terms, and the profile of the vehicle itself before signing the deal. This mirrors the examination of the terms of an investment (price, stipulations, individual situation) . It helps you avoid being trapped by the illusion of security, incurring unwanted debt or difficulties. It could also help in identifying profit/divestment opportunities in the future.

2. THE SKILLS. Once you got the knowledge, the next thing to do is to get the skills in evaluating your investments, figuring out what qualifies as a good place and time to put your money in. In other words, you need to learn how to ascertain value and the right time to enter the game. Why bother going into a company with plenty of value when the price trend is going down OR there's an impending political/economic development that you think will bog down the prices? You might as well wait... then jump in a bit before or when the trend starts going up again. Hence, the need to master both fundamental and technical analysis.

3. THE OBJECTIVES. You need an objective for your portfolio. "I'm in the stock market to make a quick buck" just for the sake of it will eventually lead nowhere. Corporations have a vision-mission statement, don't they? They need that to give an overall direction for their business operations. In the same way, you as an investor would want the same thing. It prevents overdiversification (which dilutes your profits), and keeps you in line to industries/investment vehicles of your preference or expertise.

4. THE STANDARDS. Finally, there are the standards. What qualifies as a good investment? How is this choice a buy or sell? Do I stand to earn significantly from it? How can I compare it to other options that look just as great? Without standards, it'll be difficult to identify value investments, even if you DO have the skills. You might make the wrong decision and end up losing a hefty amount in opportunity costs (or actual losses!). Standards vary among different vehicles and situations. A 5.75% time deposit and a 2% savings account will be difficult to juxtapose due to the stark difference between their terms, for instance. Furthermore, you have to keep on learning new ways to refine your standards, whether that means acquiring new skills OR redefining the way you evaluate a potential selection.



Personally speaking, my objectives are to attain and maintain over the long-term:

1. A 5% dividend yield on invested capital.
2. A CAGR of at least 20%.
3. A well-rounded portfolio of value investments, consisting primarily of equity securities. If capital and time permits, this portfolio should be spread out over several regions and industries I have some awareness of.
   

As of now, I have not yet developed the standards to evaluate a company's position in the seven elements I normally look for (can pay debt; profitable results; efficient operations; adequate returns; stable business; promising future; and, alluring valuations). The best I could do was a balanced scorecard system, but even that is lacking.

Signing out.

Value Investing - My Investment Philosophy

What actually triggered my passion for investing was a seminar held in my school about Cash Flows. It was basically a free seminar about managing one's personal cash flows to become rich, its contents based on Robert Kiyosaki's Rich Dad, Poor Dad and his CASHFLOW board game.

That seminar eventually drove me to buy Kiyosaki's Rich Dad's Guide to Investing and I read through it as I went through school. Since I was a Management major, I eventually went through topics such as Accounting & Finance, Operations Management, and Marketing. These classes cultivated my knowledge and further fueled my drive for investing, especially in the stock market.

However, Kiyosaki's book wasn't exactly practical. All it tried to do was cultivate one's business mentality, and it required a lot of effort to take from it what was useful. In the end, I started seeking out finance-based classes that taught me how to analyze financial statements of a bank and a corporation, and how to approach swap options and derivatives. And ultimately, I was led to a class taught by THREE teachers following Warren Buffett's Value Investing principle... and that's where it started.

We only had one semester, and we never covered G&D's Security Analysis as is done in Columbia Business School. However, there I learned that analysts have the power to dismantle income statements as they wished and perform valuation methods I have never seen before in my previous Finance classes. As I was armed with methods such as DCF (dividends), NAV, net-net, Residual Income, Terminal PE, and Earnings Multiple (two handouts I had contained this), I developed a budding interest to read what started it all: Graham and Dodd's Security Analysis.

I got my hands on the 1934 and 6th edition of that book, as well as the 4th edition of The Intelligent Investor. I had the latter two printed for a mere thousand pesos, a fraction of what both books would've originally cost me. Best of all, since the 6th edition had 10 chapters PLUS the appendix cut out from it, the 1934 edition actually provided me with the missing content. ^^



When I went into the world of investing the first time, I had unknowingly adopted the "Value Investing" principle. Now that I've gone through that class and read (and am still reading) G&D's book, I'm glad to say that I have fully adopted the principle of Value Investing.

Value Investing is, according to the 6th edition's preface, purchasing assets/securities for less than they are worth, the discount providing a margin of safety - room for analytical error, the uncertainty of the future, etc. It isn't a mere tool to find bargains, but a COMPREHENSIVE INVESTMENT PHILOSOPHY emphasizing

• In-depth fundamental analysis;
• Pursuit of long-term goals;
• Minimization of risk; and,
  
• Resistance to crowd psychology

VI needs skepticism and judgment, because financial statements can't capture all things affecting value, exactness of valuation can never be accomplished due to the many variables affecting a business and the personality of the analyst, as well as the "uncertainty of the future".

To be a successful Value Investor, one must thus have exceptional research and valuation skills, the ability to perform proper sensitivity analysis, along with patience and discipline. These things one can only get through experience - both analytical and practical.

What are the pros and cons of value investing? Well, for one, there are too many gamblers out there, too many people who view the stock market as risky (my grandfather, for instance). Many people wish to earn on the short-term; others overdiversify their portfolio. Human nature always ensures bubbles, and there are a plethora of investment vehicles VI's can exploit. Sometimes, the companies with value are too small in market cap for a well-managed portfolio!

The only disadvantage to Value Investing, from what I see, is that it takes so much effort to determine a mere proxy of the company's worth based on assumptions, guesstimates that even Graham reluctantly admits we should take. Furthermore, a company's "Intrinsic Value" changes over time as time passes, and sometimes it takes years, or decades, before the market "re-evaluates" its outlook on a certain stock.

For me, however, there are only SEVEN THINGS I look at, currently:

1. CAN PAY DEBT (this is number one)
   
2. PROFITABLE RESULTS (gauging profitability of the business based on income statement and cash flows)
   
3. EFFICIENT OPERATIONS (KPIs, Financial Indicators)
   
4. ADEQUATE RETURNS (DuPont analysis: provides me with an overall look at the company)
   
5. STABLE BUSINESS (quantitative observations + character of the business/industry)
   
6. PROMISING FUTURE
   
7. ALLURING VALUATIONS
   

First Steps

And so this is my very first post.

Well, I never really wanted to put up a blog in the first place. I've tried several times, but usually, I ended up neglecting them. Never knew why. Just a bad habit, I guess. Those past blogs were "personal", i.e. real-life personal. One blog I made - I have nooooo idea where it is now. Probably deleted... hopefully - was even used just to vent my frustrations.

This blog is going to be my personal blog on a subject I love with a passion that shall never die: INVESTING. Investing is something every person likes or even dreams of doing, but the moment they dirty their hands on it, they start losing money so much they fail and give up, never coming back, and associating the thought of "investing" with "stock speculation".

For example, my paternal grandfather. You mention "investing" to him and he'll tell you you'll lose money no matter what you do. The more preferable option is to simply let your money accrue in a bank or in a bond until you can put it in something closer to home: a small business. And you know what? I can actually understand his position. One of my uncles has lost $33,000 in "investing" at the stock market, and he is often described as looking at charts and everything through about 3 computer monitors. My maternal grandfather, too, has lost money, purchasing Petron preferred shares to "invest" in.

But... in the end, "investing" in a savings account or in a bond is no different from putting your money in the stock market. You're entrusting money to a third party, to a company, whose operations you have no control over (though the case is different for the stock market since you CAN wrestle control into your grasp... if you're rich enough to afford it, that is). Everything still relies on the company you've deposited/lent your money to.

Ben Graham once wrote, a junk bond could be just as good as a triple A if the company meets one's standards for investing (though this is a rare occurrence, I've read). Conversely, even the most secured bonds and bank accounts can run the risk of you losing your principal if the company is weak, due to poor financials or something it isn't disclosing (Legacy Bank Group for the Philippines; Subprime Mortgage bonds).

Attacking my grandfather's belief in the "small business" as the investment, the only difference between that and the stock market is "control". The investor has control over the business's operations and its corporate direction. Yet it is far riskier than the stock market, and my grandpa acknowledges it: 19 out of 20 newly-incorporated small enterprises in the Philippines fall. In the USA, I've read that over 90% of the businesses in America are enterprises, yet most of them still fall or remain in obscurity.

Robert Kiyosaki, whose book (Rich Dad's Guide to Investing) inspired me to seek out the world of investing, asserts that the failure of businesses occur due to the owners' inability to secure their enterprises' ability to survive in their absence, i.e. the company will live on if the owner can fully place his trust and confidence in a competent manager who can do all the work and focus instead on other investment/business opportunities. Otherwise, if the owner ever dies / leaves / otherwise rendered unable to operate the business, the corporation shuts down utterly. (Though he insists that owning a business IS the path to richness, but only if you have what it takes to make it...)

Anyway, I just want this blog to represent not only my journey through the world of investing and business as I grow up amidst trials and tribulations arising from mundane work and life in general (which is especially important now that I have officially graduated from my university into the so-called "real world"), but also my thoughts on investing, on certain literature, and well, on companies that I end up liking. Anyone who ends up reading this is free to school me on what they think, suggest a company they like, or whatever. All these are my thoughts.

Why I named this "Analysis Paralysis" simply stems from that very concept: you spend too much time analyzing you NEVER get anything done. I come across this term multiple times whenever I'm analyzing something, and I agree with it. My first value investment - a geothermal energy company in the Philippines whose stock price was at its 3-year-or-something low (due to an extremely low net income) - was an opportunity I FAILED to miss early on, just because I kept on analyzing and analyzing over six months and never even bothered to place my money in a brokerage and put it in there. The result? I bought it at PHP 4 a share when I could've purchased it at P2.5 a share two months earlier. It's at PHP 5/sh right now and the target price is still at a high PHP 6.5 a share. Damn. >.<

I swear, I must never let it happen to me again. And whoever's reading this, the same goes to you. Seriously.