Sunday, 6 September 2015

8 ways to vote like an investor

Its election time, and politics are everywhere in the air! Not going to take a side, but heres a light-headed post on how one would vote if they solely base on investing logic and quotes.

P.S: Yes I know that voting based on investing logic alone is not a wise choice to do, since there's so many other social/personal issues to consider. 

But if you buy a share (pay taxes), receive the company's annual report (GDP numbers), get dividends (GST Vouchers), aren't you a shareholder (voter), participating in this AGM? (Elections)

Ok the comparison is not exact but close enough. We are closer to a worker/shareholder-ish type of person. We like the company to make money, but we also like our wages to go up, which means the company makes less money. Hmm.

Anyway here's 10 things to keep in mind if you are voting like an investor!

Earnings Growth

1) Past performance is not a good indicator of future performance
To be fair, investors assign a higher P/E multiple to company's that showed solid historical growth. 

To be unfair, investors mostly care about the company's plans for the future and its future earnings. Not its past numbers, nor its miraculous growth from a fishing village penny stock to a blue-chip company. 

If that's the case, we should all be buying Osim.


Yeah, I'm an ungrateful investor for selling out a stock even though it gave me 300% returns within a single generation!

2) How will the company fund its future growth?
1) Current retained earnings?
2) Debt?
3) Share issuance?

Would you be alright if the company issues new shares to increase its total number of shares outstanding to 6.9 million which dilutes your stake?
Or would you rather its funded by debt, retained earnings, or a mix of all 3?
Isn't the raising equity the most expensive option?
Would the dilution be worth the future growth?
What if the foreign ownership of the company increases >50% and they sell out at the first sign of trouble?

Accounting

3) A company's stock usually falls sharply after an accounting scandal/accusations
Take a look at Noble stock price, tanking on accusations from some anonymous twitter handle.

Whether its true or not, investors are quick to sell out when there's a whiff of accounting irregularities (Especially if you submit your financial report late, especially especially when your surplus is suddenly reported as a deficit) 

To be even more unfair, Mr Buffet states 'There is never just one cockroach in the kitchen'













Dividends

4) A company should only retain its profits if its able to reinvest it at a higher rate of return for its investors than paying it out as dividends.

Plus points if the company has a subsidiary Company to Invest its profits Globally for you. Even Mr Buffet doesn't pay dividends.

5) A company usually allows a person to reinvest his dividends in shares or just take the cash 

Even though every year the form my company sends that allows me redeem my dividends in cash or in stock goes straight into the trash (I don't like odd lots). I would find it weird if the company stops doing so one day and reinvests all my dividends at a 2.5%/4% or whatever rate. 

Come on, at least give me the option of throwing the form in trash. It gives me a sense of power.

6) A company that borrows money to pay dividends isn't really sustainable
Sure its all fun and games when the company gives you $500 in dividends a month, but watch out when its debt/equity ratio balloons. (Especially when the company already has debt > 100% of GDP)

Corporate Governance

7) A company should have independent directors on the board, especially for the compensation committee
Don't look at me, this is stated in my notes. Corporate governance also states that the CEO/Chairman of the board should be different people, even if they are the founders (or the founder's sons) of the company. 

8) Should a company provide food during its AGM?
Hmm maybe chicken rice packets are welcomed, but offering shuttle bus services to the AGM is stretching it abit. Heres Asiaone stating that 'AGM is not an annual general makan'

Conclusion

I guess the best way to round up all this is to ask ourselves whether Warren Buffet would buy Singapore if its a company, since he has a reputation for only buying good quality business

(1)    Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units)

Check, our GDP is way higher than this

(2)    Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),

Check, we have a 50 year old track record, something Warren would appreciate

(3)    Businesses earning good returns on equity while employing little or no debt

Half check, although our returns (GDP) per equity (workforce + capital) is pretty good, we do employ alot of debt.

(4)    Management in place (we can’t supply it),

Check, ok at least by next week it should be check

(5)    Simple businesses (if there’s lots of technology, we won’t understand it),

Not really, we are moving into biopolis, fusionopolis and all that high tech stuff.

(6)    An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

I really hope there's no offering price. Although it be pretty cool if we get bought out and the cash gets redistributed to everyone.

I guess Warren would rate this country ok!

2 comments:

  1. Hi LX,

    That is a very interesting way to look at an election. Well done.

    Maybe I can add on one more point which is quite impt.. Competition!

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    Replies
    1. Yeah, would you vote in a CEO that has a good past record, but delivered normalized growth recently, or someone that is totally new and promises to restructure the company?

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