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.