History’s greatest investments weren’t only decided on calculators. Investing is an art, not a science and the ability to analyse beyond the numbers is how you will make great investment decisions. Although number-crunching is a crucial aspect of valuation, it is not the be-all and end-all of investing. Here are 3 important, but often undervalued company traits you should pay closer attention to.
Who are your fellow shareholders?
Numbers, tables and charts jam-packed into one tight A4 page. That’s what the first page of any institutional stock research paper will look like. But as with all things (including investing), it’s not the quantity of information that matters most, it’s the quality.
One attribute you’ll rarely find in these institutional research reports is the list of substantial shareholders. The shareholders list isn’t considered a key piece of information because it’s not comparable across companies. It also requires more work to dig up and understand the background of each substantial shareholder. In contrast, the price-earnings ratio, dividend yield and earnings per share are easy to understand concepts that can be applied across every company. It makes for easier cookie-cutter analysis, but not necessarily better analysis.
Substantial shareholder lists tell you things that the numbers simply can’t show. They tell you the people behind the company you’re investing in. More importantly, if you dig deeper, you can ascertain what their motivations are.
Businesses (and their success) is driven by people. Owners of the business (people), and the managers they choose to run the business (people), all contribute to how desirable their product or services are to customers (people). The measurement of success in how well these people interact is ultimately reflected in profits.
At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business is a significant clue to understanding the long-term drive of the company.
For instance, take Myer (ASX:MYR) as an example. Founded in 1900, the company grew significantly under the ownership of the Myer family over the next century. But as Myer acquired more businesses over time, it required more external funding and the shareholders register changed significantly. Although numbers improved under private equity ownership from 2006 to 2009, the motivations of private equity firms were very different to its original founders. Looking beyond the numbers was key to avoiding the IPO in 2009.
Predict your customers’ needs
If people drive profits, then profits can only be made if customers are truly satisfied. By investing in a company, their customers become your customers. The happier your customers are, the more they want to do business with you, and the more they will line your pocket.
The numbers-based desktop approach is to predict future revenue by extrapolating the trend of the past few years. This is a useful rudimentary tool but in order to understand the total picture, you should also pay attention to customer feedback. In a global world where customers have expanding choices, customer loyalty is hard to come by. Tastes are fickle. This makes it harder to estimate revenues using only historical numbers. Customer loyalty is best understood by customer feedback, not by extrapolating past numbers. Understand the psychology of your customers and you will understand how your profits will grow.
Many fundies missed the demise of Research In Motion Ltd (now known as BlackBerry Limited TSE:BB). They had taken the revenue growth from 2009 to 2012 (which almost doubled during this period) and assumed that the same growth would continue. Instead, from 2012 to 2015, revenue fell 80%. If the focus had been on customer feedback instead, it would have been obvious that customers never really got used to the physical keyboard - touchscreen was the way to go.
With the wide availability of online customer feedback, it’s not hard to find out what your customers think of the products / services your company offers. Even better, examine the product / service yourself. Do you like it enough to be a repeat customer? Has the company shown a willingness to adapt to feedback quickly?
Extend this qualitative research to employee satisfaction and you’ll get an even better picture of the company’s prospects. Examine the personnel the company is hiring, the skills they are looking to fill, and the feedback from existing staff. This will tell you how they’re looking to grow.
Broadening your field of vision
There are rarely any one-horse races. In any market, there are always multiple competitors, each vying for a stake of the market share. As an investor, we’re not tied down to any one horse. We have the freedom to analyse the field and choose the best horse who will run the best long-term race.
Unlike institutional fundies, nimble investors have the freedom to explore freely across multiple industries and geographies. If your investigations into a company leave you underwhelmed, move on to its competitors. Chances are the original company is only mediocre because it’s facing a successful competitor. Extending this concept, you should explore freely across borders and industries. These days, competition is more likely to come from overseas and other unimaginable industries.
Who could have imagined 6 years ago that a solid company like Cabcharge Australia Limited (ASX:CAB) would face immense competition from a US-based company, let alone a technology company with no experience in the transport sector? Take the blinkers off and move freely across country and sector to find the best horses in the global race.
All listed companies around the world must provide commentary about their performance and outlook on a regular basis. There you’ll find clues about where they see threats coming from. From there you can dig further to discover the emerging horses in their market. Meeting with management has the advantage of better understanding of how they view their competitors, but this is opportunity is harder to come by for individual investors. Instead, company transcripts of Q&A sessions with shareholders will contain a treasure trove of information about their competition. Once you’ve identified the competition, read the competitor’s analysis on the market and you’ll gain the challenger’s perspective.
The motivations of a company’s owners, the psychology of it’s customers and the strategy of its competitors are key factors of future profitability. These traits are often time-consuming to uncover and the analysis isn’t black-and-white in nature. They aren’t easy to ascertain. But this is where the true value lies. It is this understanding that separates a enterprising investor from those that rely only on widely disseminated numerical data. Look beyond the numbers and you’ll be closer to uncovering the truth. As Peter Lynch says ‘in investing, the person that turns over the most rocks wins the game’. Happy compounding.
Great article thank you
Good article, thanks! I would add a fourth - a detailed read of the remuneration report is enlightening as to the motivations of the directors and key management personnel.
Agree. As Warren Buffett says, businesses run well when everyone eats their own cooking.
Great article, but in a nutshell - SWOT. Not only for the company managers but also for the investor (whom by many opinions should see oneself as part of the company to begin with!).