Before we embark on value investing, it is important that we set our foundations right. Failing which, we will find ourselves floundering in deep water without a floating vest on. As with other activities in life, one must first learn the basics before he or she can move on to mastery. In investing, the process is no different. Without further ado, let’s take a closer look at some of the very foundations of value investing. 


Exercise Independent Thinking

 

When it comes to buying stocks, many investors like to rely on tips from their brokers or friends. Even though there is no fault in this, a sound advice for investors is to verify all information and exercise independent thinking.

foundations of value investing
Instead of taking what is being said wholesale, look into the numbers and understand the business. Put simply, conduct your own research. Upon conducting your own investigation, decide if an investment is worthwhile based on your own discretion.

Based on past experiences, it is not uncommon for these hot tips, be they from brokers or financial advisors, to be mere rumours that would simply lead you on a wild goose chase. As such, never make investment decisions based on the opinion of others, but based on facts and figures. This is when your judgment comes in.


Beware of Herd Mentality

 

Many people have this tendency to be followers. They are inclined to turn towards their leaders and do not stop for a second to think for themselves. While this tendency could be innate, I reckon it is really the result of our education system, society norms and culture.

foundations of value investingBut as an investor, we cannot afford to be followers. By this, we don’t mean be a rebel, but an investor who demonstrates the ability to think and exercise critical thinking. Here, the ability to make the tough decisions cannot be further emphasised.

A rule is to never follow blindly what another person tells you to do. Stop, think and assess the situation. Would this decision serve your interest? Will this decision serve a higher purpose in society? Based on what you know, or do not know, make a decision with greater conviction.

In many workshops, trainees are told to simply follow a system. This however, should be done with caution. Knowing that there are schemes designed to deceive others, we need to make prudent decisions. The richest people invest when there is an opportunity and when it makes sense, and not merely the bidding of others.


Start Investing Within Your Circle of Competence

 

Many people invest in what supposedly is the hottest market, sector or stock. But more often than not, markets and stocks are on the lips of everyone are probably the very ones to avoid. On the contrary, you should invest in markets or stocks before they become much talked about.

So instead of relying on others, invest in a business that you know first-hand, or are familiar with. This is known as investing within your circle of competence.

foundations of value investingHow does one go about investing within their circle of competence? Well, you could first get started by looking at companies that you know a thing or two about. For example, this could be the listed company you are working at.

Start by first looking into the financial position of the company. Do you understand the company’s operations? If you are aware of all these and take the time to understand the company inside out, you are already ahead of many analysis in terms of knowing the company’s business operations. It would be better if you are already part of the top or even middle management of the company.

If you are not working at such a listed company, take a look at the consumer products you frequently buy. One of the things many investors often do is being on a constant lookout for products or services in the market.

If you are into health products, you will probably be familiar with essence of chicken. For a long time, Brand’s Essence of Chicken has been perused by many. When it comes to essence of chicken, they are the market leader. Should you inspect the product’s packaging, you will know that this product is manufactured and distributed by a company called Cerebos Pacific Limited. A simple check will help you learn that Cerebos Pacific Limited is a fundamentally strong company. This process of conducting ground work on the product, researching and understanding the company becomes a necessary for one to ascertain the company’s long-term prospects and profitability, before deciding to invest in it.

foundations of value investingAnother example is the health chain Eu Yan Sang (EYS). Some years back, EYS underwent a transformation to shed its images as an out-dated traditional Chinese medicine (TCM) company, to portray itself as a modern TCM business. As a result of this rebranding, repositioning and transformation, EYS began to appeal to modern Singaporeans and Asians who are in favour of a holistic approach towards well-being.

Based on the prices of EYS’ products, it is not difficult to tell that they position themselves to provide higher quality products. As such, they command premium prices compared to other TCM retailers. One can tell that they are growing based on the number of EYS outlets. The status of their growth and performance can be further verified by referencing their financial reports.

Similarly, you can take a look at other products in our supermarkets for investment ideas. Even though there is a wide range of shampoos being marketed under different brands, many of them are produced by Procter & Gamble (P&G). As this is a US company, you can decide to purchase their stocks on the US stock exchange, preferably when its price is undervalued or fairly priced. If you are to look at it this way, the best opportunities could be right under your nose!


 

Assessing Companies’ Performance

 

Another important concept in investing to note is buy-and-hold. Warren Buffett became very wealthy by becoming a buy-and-hold investor. But it is a widely mistaken concept. Generally, a buy-and-hold strategy is carried out on companies with a positive performance and are growing; you do not want to hold companies that are fundamentally poor.

A company’s performance can be assessed within a couple of years, based on figures from their business operations. To better understand their operations, we can refer to company reports usually issued on a quarterly basis.

foundations of value investing

It is important to assess a company’s performance, as we have to predict the performance of the company going forward. If a company’s performance is going downhill, we have to ask ourselves why this is happening and conduct as much research as possible to understand the situation and decide if they are able to turn the situation around. Conversely, if the company is doing well, we should determine the reasons behind its performance. If we can identify the key reasons for their performance, we will know what to pay more attention to when reviewing the company’s performance in future.


Now that you have a better understanding of the foundations of value investing, why not put it to practical use to help you multiply your wealth?

So start by registering for our complimentary value investing masterclass now and learn how to start investing in Singapore! Through the power of compounding, you’ll find that the sooner you begin, the better returns you’ll get back!

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This article was written by Jonathan Soh
Jonathan is currently a digital marketer at VIC. He joined VIC about a year ago and started to learn how to invest in March. He recently bought his first stock a few months ago.

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