Saturday, February 26, 2011

The best investors KISS and understands

I think it was Peter Lynch that once said something along the lines of “if you can’t explain to a child the reasons why you want to buy a certain stock or make a certain investment, then you should probably rethink the decision to make that investment.” And I think that it was Warren buffet that said something like “if you can’t make a decision to invest in 5 minutes, you can’t make a decision in 6 months.

These 2 values of keeping things simple and understanding any investments that you commit yourself to are, in my opinion, an essential part of any great investor. After all, there are not many things that you need to look at when determining whether or not an asset would make for a good investment; there are crucial things to look at such as competitive advantage, price, return on equity, and a few other things when evaluating the investment appeal of a company’s stock, but there aren’t many of these crucial things. By keeping things simple, ignoring the noise, and looking out for the things that matter, we can make much better investment decisions.

It is through understanding that you can tell within minutes the reasons why an investment has the potential to produce good returns. If you can’t tell within a few minutes if a company would make for a good investment, then you don’t understand the company, and if you don’t understand something, you shouldn’t invest (gamble) in it.  By knowing which companies have the potential to do well, and which don’t, we can also save a lot of time by researching only the companies that have good prospects. The returns we enjoy would very probably also improve, as we are now only valuing assets that we understand and that have potential to produce attractive returns for us.

By keeping things simple and understanding what we’re doing, we will not only be able to explain to kids the reasons why we make an investment or decide, in a matter of minutes, if an investment is worthwhile researching, but more importantly, our returns could improve significantly, and our risks will be reduced.

So, understand what you're doing and always remember to tell yourself to keep it simple stupid (KISS). There is so much more value in kissing your girlfriend/boyfriend whom you love and understand than a meaningless kiss in a one night stand; the same concept applies to investing.

Thank you for reading, and may you always sustain good returns on your portfolio. Take care.

Monday, February 21, 2011

The employee saga part 1: Hiring the right people

You're only as good as the people you hire. –Ray Kroc

It is important to find and hire people that you believe are honest, passionate about what your company is setting out to achieve, believes in and have the desire to provide customers with great service, and can fit in well with your company’s culture. If you can get the right people on board, the other stuff will start falling into place. I remember reading in Jim Collins’ book “From Good to Great” about how some companies that became really great focused first on hiring good employees, then only on which direction to take the company.

The right people are driven, self-disciplined, take pride in their work and in serving customers, like to step up and make decisions, and conduct themselves with integrity. Employees with these qualities don’t need to be constantly monitored, can be empowered to make decisions and use their judgment in their work, and can be trusted to really perform for your company. It is after all your employees that make your business run, take care of your customers, and create value for your company. They are the ones that are in the best position to make decisions, and it is through their skills, talents, and efforts that real value is unlocked in your business.

Management’s job is to hire these good people, train them and help them grow, create and maintain a culture where they can thrive, cut out bureaucracy, put in place a relevant compensation system, as well as do other things to ensure that  employees are able to perform at a very high level  and drive superior returns for their company.       

To select the right people for our companies, we need to have in place a thorough and well-designed hiring process. It’s important to involve our employees in the hiring process, as they would be in a good position to identify people that would do well in your company. 

According to the book “The New Gold Standard,” The Ritz-Carlton really takes the time to select good people to come work for them and become a part of their family. And because The Ritz-Carlton invested so much time and effort in selecting their employees, the people that do get selected to join the company feel a sense of pride and believe that the company thinks that they are really good and expects a lot out of them, this will drive them to live up to the standards that are expected of them.

Back to the point I made earlier about finding and hiring people that you believe have integrity, are passionate about what your company is doing, and fit in well with your company’s culture. It isn’t enough if your potential employees are smart and have the relevant skills but lack any one of those qualities. If your employees aren’t passionate about what your company is doing, they won’t give it their all for your company.  If your employees can’t be trusted to conduct themselves with integrity, you can’t empower them to take the initiative and make decisions.

Tony Hsieh, the CEO of Zappos once said that “your culture is your brand.” And if you hire people that don’t fit in well with your culture, you are destroying your brand. Imagine that a company has a culture that is very customer oriented, but it starts hiring people that might not necessarily be customer oriented. When that company’s customers come into contact with these people, they will get disappointed with the service and tell their friends about their experience with that company; over time, this can lead to significant impairment of that company’s brand. By hiring people that don’t fit in your company’s culture, not only will these people not thrive in your company, they might damage the culture and bring down your other employees that were doing well in your company.  

We need to think about efficiency when hiring, not only because we can cut costs by needing less people than our competitors to do the exact same jobs that they do, but also because we wouldn’t need to layoff so many people when things get tough, this in turn would result in your employees feeling more secure about their jobs and being more loyal to your company.

We need to have the patience to carefully select our future employees and not just hire anyone because we are short-staffed or something. We also need to fire bad employees as they might demotivate and drag down the good employees that want to work hard.

If you have any questions, or have anything that you would like to share, please feel free to comment. Thank you for reading, and may you always sustain good returns on your portfolio. Take care.

Saturday, February 12, 2011

Long-term greedy

Being long-term greedy is a philosophy popularized by Gus Levy, former senior partner of one of the most successful financial institutions of all time, Goldman Sachs. It’s just so profitable to be long-term greedy that I can’t for the life of me understand why any company or investor would do things that only have short-term benefits in favor of positioning themselves for the long-term.

A lot of speculators would buy a stock with the hopes of selling that stock with the next quarter or two at a profit.  Not only are these short-term greedy decisions not as profitable as investing for the long-term, it’s gambling and not investing to buy a stock for the short-term and for reasons unrelated to the fundamentals of the business; things might not happen exactly the way the speculator or some idiot on TV that the speculator listened to predicted, and the stock might plunge in value because it missed earnings estimates by 2 cents, or gross margins are down 1%, or some other short-term reasons. Even if you were to invest based on fundamentals, a stock can be irrational in the short-term and its price might not reflect its intrinsic value.

If they’re lucky and their bets pay off, speculators can sometimes make money, just like how a gambler might sometimes win at roulette. But most of the time, those short-term gains pale in comparison to the gains (potentially amounting to many times the original investment of the investor)  that an investor can get if he or she simply invested in great companies at reasonable prices for the long haul. Warren Buffett didn’t try and time the market; he just invested in great companies and let those great companies create value for him over many, many years.

Companies and entrepreneurs can also benefit tremendously from being long-term greedy. Spending a little bit extra to surprise customers or to make up for any problems the customer might have encountered can result in the customer having a good experience and becoming a customer for life, continuing to invest in a downturn when assets are cheap can result in good future profits (I remember reading somewhere that Panera Bread opened some of its most profitable stores during the recent recession), and helping out the communities it operates in because a company cannot thrive when society is suffering (to me, helping others is simply the right thing to do, but being socially responsible do come with long-term benefits) are some of the ways for a company to take a long-term approach.

At the end of the day, investors should look for companies that are long-term greedy, and entrepreneurs should focus on being greedy for the long-term when running their companies, as the companies that are long-term greedy are the ones that create the most value for their shareholders.

Short-term greedy companies have many disadvantages, not only are they less well-positioned for the future, they can also destroy a lot of value for their shareholders. Take the financial crisis for example, the banks could have been in much better shape had they not made out so many loans to people who were buying houses that they couldn't afford. But the banks were only thinking about all the profits they could earn(and the bonuses they could pocket)  by making out those loans, and not thinking about how sustainable those profits really were. A lot of those loans eventually went bad, and many banks either went under or saw their stock plunge in value.

While I'm not saying that the financial crisis could have been prevented if the banks were more disciplined in their lending, I'm pretty sure that shareholders wouldn't have suffered so much if the banks weren't so focused on the short-term. Further evidence of the value of long-term greed: when all was said and done, it was the banks that were long-term greedy and kept their heads in the madness that not only survived, but took advantage of the crisis and acquired assets on the cheap and set themselves up to create good long-term value for shareholders.

Thank you for reading, and may you always sustain good returns on your portfolio. Take care.

Saturday, February 5, 2011

The pride of ownership

It's always awesome to think about the stocks you own as representing part-ownership in businesses as opposed to pieces of paper that move up and down in price everyday. I get a mental boost every time I see someone wearing a pair of jeans that's made by a company I own stock in and think to myself how I got a small part of the profit (a very minuscule part to be exact) from the sale of that pair of jeans.

When I'm on a bus on the way back to my hometown, and I pass by a plantation belonging to a conglomerate that I'm a part-owner of, I'll imagine all the palm oil being harvested there and how that company, a company I own a tiny piece of, is responsible for employing thousands of people. I would look around at all the happy people at one of the best shopping malls in the country, a shopping mall I'm a shareholder of.

By thinking about stocks as real businesses that earn profits, employ people, make products, and create value for customers, we will not only be able to shrug of the need to take part in speculation, but we will also be able to make better investment decisions as well. When we think like business owners, we start looking at things like competitive advantages, returns on equity, sustainable growth, what are reasonable prices to pay for shares in businesses, and etc; these are the things that we should think about if we want to find investment opportunities that have the potential to deliver really spectacular returns.

It's also just plain awesome to drive around and see restaurants, office buildings, petrol stations, or whatever businesses that you're a part-owner of and get a cut of the profits from. It's like you're watching over your business empire (even if it might be a very small empire). That to me is the pride of ownership.

Thank you for reading, and may you always sustain good returns on your portfolio. Take care.