Kicking the tyres — first hand investment research
13 February, 2015
You have some money in the bank. You decide you'd like to buy some shares. You visit your sharebroker's website, print off their newsletter and read a paragraph about an attractive sounding company with a BUY recommendation.
You instruct your broker to buy some shares. You receive confirmation you are now the proud owner of 2,000 shares in ABC Company and you sit back and wait for the share price to rise. Unfortunately, after six months, it has fallen 5 per cent and, after 12 months, is 10 per cent lower than you paid.
You have no way of knowing whether to hold, sell or buy some more. You need to go back to the person who made the original recommendation and find out whether it still holds.
When I started work as a sharebroker, I had numerous clients who had accumulated share portfolios in a higgledy-piggledy way and had no idea whether their share holdings were good, bad or indifferent. They had bought on the basis of someone else's research, often without really knowing anything about the companies they had invested in.
When I became an investment analyst and was required to produce those very recommendations that clients relied on, I felt uncomfortable writing about the merits of a company before I had an opportunity to assess the business thoroughly. For me, annual reports, newspaper clippings and valuation spreadsheets were never enough. I felt the need to "kick the tyres" or investigate the businesses for myself.
I needed to meet the chief executive and preferably other members of the management team. I needed to walk around the factory and get a feel for how clean, efficient and modern the facilities were and how enthusiastic and hard-working the staff appeared. I needed to spend an hour or two asking what may have been dumb questions and have them answered satisfactorily before I could be comfortable recommending the company to my clients.
I then needed to talk to the company's competitors and gain an understanding of the industry so I knew who the market leaders were, who was growing fastest, who the others were watching and who was losing market share.
Having employed this "kick the tyres" approach to investing for more than 20 years, I still believe it is the only way to go. Of course you can still get it wrong. You will come across chief executives who prove to be too optimistic in their assessments or companies whose competitive advantage disappears with the emergence of a new player.
But at least when your investment goes wrong, you understand why. You can go back and revisit your original assumptions and identify which aspect of your investment model was flawed. You can then decide whether the flaw is fatal, in which case the shares should be sold, or whether the problems are temporary and the original investment case remains intact. If most of your assumptions hold true, it could make sense to retain your shareholding and even buy more.
Picking companies to invest in is not a science and it is not simply a case of being right or wrong. But undertaking your own research and understanding the "story" behind each company, allows you to be more scientific and logical in investment decision-making than simply following somebody's advice.
Property investors generally like to visit their property and try out the lifts, the taps and the toilets before buying. Forestry buyers often like to visit the forest plantation and check out the trees. Art investors like to eyeball their paintings and compare similar works. Yet share investors are often prepared to buy on the say-so of someone who has written a report about why the company is good buying.
Having kicked a lot of tyres over the past two decades, I reckon investors can get an advantage by getting up close and personal with their investments, before they invest and after. With so much information available, it is easy to assume that investing doesn't need much effort and everything one needs to know can be learned without going to the source.
Not so. Kicking the tyres, wearing out shoe leather, doing fundamental analysis ... all these well-accepted terms have become so for a reason.