Circle of Competence - A Discussion

I thought it appropriate to bring this up - how would forumers here define their circle of competence with respect to investing knowledge? For example, which industries or sectors are you knowledgeable about and comfortable with investing in? How have you managed to get so much information about the sector in order to feel "competent"?

Also, any suggestions on how to expand this circle of competence (as it is not supposed to be static) and branch out into other industries?

Let me start off, I am comfortable with the following:-

1) Oil and Gas (through Ezra and Swiber previous investments, though I won't put money in these companies now except for MTQ)
2) MRO segment (due to reading/studying SIA Engineering)
3) Services Segment (i.e. Interiors, Events Management) - understanding the business model of Kingsmen Creatives
4) Real Estate Segment - read up a lot about it and tracking local news about property measures, though I am not comfortable at this point to put money in developers or holders of investment property.

Some segments I cannot get a hang of:-

1) Retail operations - too fragmented and fast-moving
2) Fabric Manufacturers - Unless I see the ops myself, it's hard to understand the business
3) Telcos - Too much jargon!
4) Tech companies - includes those like Aztech, Neratel which involves tech (I am lousy at tech)
5) Luxury Goods Segment - Don't understand the drivers behind it as I am a frugal guy - understanding the mindset is admittedly tough
6) Commodities companies - Noble, Olam and Wilmar are beyond me. How they can survive on RMI, huge leverage, thin margins and negative FCF is a conundrum to me.

As for how I am expanding my circle, by reading and understanding. Currently I am working to understand retail and luxury goods better, as well as the fast moving consumer goods market.

Welcome more contributions to this thread!

(16-10-2012, 09:27 AM)Musicwhiz Wrote: 3) Telcos - Too much jargon!

Think in terms of 'Black Box'. I don't spend a lot of time trying to understand the whole technical infrastructure of 3G, 3.5G, 4G,... I only focus on whether they can pay the dividends from their FCF... Oops...

Singapore is very unique that for all critical industries, we always have 3 companies 'competing' with each other. Unlike bigger markets like US, I don't see them rocking the boat too much to kill each other. So, ya, I'm guilty of being lazy when I invest in our TELCOs. I only get interested when there's a sudden drop in price for any of the TELCOs or for the Dividends when it's closer to cd time...

Quote:4) Tech companies - includes those like Aztech, Neratel which involves tech (I am lousy at tech)

This ought to be within my Circle of Competence. BUT, it requires a lot of work to keep up to date with the fast changing industry. Also, the SGX listed cos. are mostly in the supporting biz and their destiny is dependent on their key customers. I have mentioned before that I'd rather focus on the giants elsewhere if I really want to make any meaningful amt of $$ for the vast effort required.

The industry is also very wide, many in totally different sub-segments.

Companies like Aztech and IPC had been listed for >10years (?) but had struggled thro' many different cycles and evolved into different biz. I wouldn't touch them unless I'm looking for cyclicals or turnaround situations. Even Creative, which used to be the No.1 in Sound Cards had not been able to keep up as many of their High End Sound features become integrated into Chipsets. Neratel is easier to understand as they're in distribution + technical support.

Quote:5) Luxury Goods Segment - Don't understand the drivers behind it as I am a frugal guy - understanding the mindset is admittedly tough

I used to have the same problem...
Thinking in terms of % of Net Worth should help... For eg.

Net Worth = $100,000
$10 = 0.01% => Don't need to think so much to spend
$100 = 0.1% => More thinking before spending
$1,000 = 1% => Better discuss with spouse 1st...

Net Worth = $500,000
$50 = 0.01% => Don't need to think so much to spend
$500 = 0.1% => More thinking before spending
$5,000 = 1% => Better discuss with spouse 1st...

Net Worth = $10,000,000
$1,000 = 0.01% => Don't need to think so much to spend
$10,000 = 0.1% => More thinking before spending
$100,000 = 1% => Better discuss with spouse 1st...

Can also think in terms of Salary. The same % of $100k p.a. is different from $1,000,000 p.a.


Lastly, I learn mostly from Internet Searches + Annual Reports + Others in this forum. Mostly, I don't go too much in depth into the technical aspects of the products but will look into their market position and competitors to get a feel of where they stand and their sustainability.

(16-10-2012, 10:49 AM)KopiKat Wrote: Net Worth = $500,000

Net Worth = $10,000,000

From 500K to 10 mil - drastic jump?
Spending power very diff wor!!!

Reading and understanding is knowledge only. i will be naturally more and more competence as i put more and more of my money into the thing i am interested in and get "burnt". Then hopefully i will be better and better the next, next round. i have lost so much money in stock investments but i have made more than i lost.
Amen.

(16-10-2012, 11:00 AM)etan Wrote:

(16-10-2012, 10:49 AM)KopiKat Wrote: Net Worth = $500,000

Net Worth = $10,000,000

From 500K to 10 mil - drastic jump?
Spending power very diff wor!!!

Relax lah... not talking about my own Net Worth!

Just giving an example of how the mindset of someone with $10Mil Net Worth when buying Luxury items like a $10k watch may be no different from those with $100k Net Worth paying $10 for a non-luxury item ie. it's the same 0.01% of Net Worth.

Also, not forgetting how Singapore has the highest concentration of Millionaires in the world and we can understand why Luxury biz is able to make $$. But, of course a recession will still hold back spending for luxury items, regardless of Net Worth...

(16-10-2012, 11:06 AM)Temperament Wrote: i have lost so much money in stock investments but i have made more than i lost.
Amen.

I am just the opposite - I have lost much more than I have made from stock investments, and it's very very unlikely that I could ever recoup my past losses! To make myself feel better, I always try to think that I had donated it to whatever charity you call it.

(16-10-2012, 11:19 AM)etan Wrote:

(16-10-2012, 11:06 AM)Temperament Wrote: i have lost so much money in stock investments but i have made more than i lost.
Amen.

I am just the opposite - I have lost much more than I have made from stock investments, and it's very very unlikely that I could ever recoup my past losses! To make myself feel better, I always try to think that I had donated it to whatever charity you call it.

That's very frank of you!
First, I am sorry for your losses and hope that you will recoup them in future.
However, do you mind sharing with us the lessons learnt?
I guess it will be benefical to all of us including yourself.
Sorry if I have offended you with this request.

(16-10-2012, 11:31 AM)camelking Wrote: That's very frank of you!
First, I am sorry for your losses and hope that you will recoup them in future.
However, do you mind sharing with us the lessons learnt?
I guess it will be benefical to all of us including yourself.
Sorry if I have offended you with this request.

I jump into stocks without having the slightest idea what the game was all about. I had this so called 'friend' who said that buying and selling shares is that easy, by pressing the remote buttons (last time still not computer literate, got only TV) you can do 'biz' in the comfort of your home, people won't know how much biz you generate, becos you dun need those lorries, or drivers or any office staff for that matter, no rental, etc. So you see, how silly I was!

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(16-10-2012, 11:40 AM)etan Wrote:

(16-10-2012, 11:31 AM)camelking Wrote: That's very frank of you!
First, I am sorry for your losses and hope that you will recoup them in future.
However, do you mind sharing with us the lessons learnt?
I guess it will be benefical to all of us including yourself.
Sorry if I have offended you with this request.

I jump into stocks without having the slightest idea what the game was all about. I had this so called 'friend' who said that buying and selling shares is that easy, by pressing the remote buttons (last time still not computer literate, got only TV) you can do 'biz' in the comfort of your home, people won't know how much biz you generate, becos you dun need those lorries, or drivers or any office staff for that matter, no rental, etc. So you see, how silly I was!

I forgot to add: Invest in knowledge first before anything else!

(16-10-2012, 11:40 AM)etan Wrote:

(16-10-2012, 11:31 AM)camelking Wrote: That's very frank of you!
First, I am sorry for your losses and hope that you will recoup them in future.
However, do you mind sharing with us the lessons learnt?
I guess it will be benefical to all of us including yourself.
Sorry if I have offended you with this request.

I jump into stocks without having the slightest idea what the game was all about. I had this so called 'friend' who said that buying and selling shares is that easy, by pressing the remote buttons (last time still not computer literate, got only TV) you can do 'biz' in the comfort of your home, people won't know how much biz you generate, becos you dun need those lorries, or drivers or any office staff for that matter, no rental, etc. So you see, how silly I was!

---

(16-10-2012, 11:40 AM)etan Wrote:

(16-10-2012, 11:31 AM)camelking Wrote: That's very frank of you!
First, I am sorry for your losses and hope that you will recoup them in future.
However, do you mind sharing with us the lessons learnt?
I guess it will be benefical to all of us including yourself.
Sorry if I have offended you with this request.

I jump into stocks without having the slightest idea what the game was all about. I had this so called 'friend' who said that buying and selling shares is that easy, by pressing the remote buttons (last time still not computer literate, got only TV) you can do 'biz' in the comfort of your home, people won't know how much biz you generate, becos you dun need those lorries, or drivers or any office staff for that matter, no rental, etc. So you see, how silly I was!

I forgot to add: Invest in knowledge first before anything else!

Hi etan, do not be discouraged about making back money you have lost. Actually you have your lifetime to invest to make back. How old are you now? I am going to be 65 soon and i started investing only at 40 year-old. (Everyone "old" in this forum will know) And as long as my wits live with me, together we will invest.

This last 2008/2009 Big Bad Bear pawed my stock portfolio down to about 50% at once stage. Now 2012 not only i recover my losses, i make some money too. If Mr. Market keeps on going North, i will keep on unwinding my position as i travel with Him. If Mr. Market suddenly decides to take a fighter plane and dives South, i am prepared to go with him too.
Another words be prepared for all eventualities Mr. Market throws at you. This then is my investment's "principles".
May you recover your losses.
Amen.

(16-10-2012, 10:49 AM)KopiKat Wrote: I used to have the same problem...
Thinking in terms of % of Net Worth should help... For eg.

Net Worth = $10,000,000
$1,000 = 0.01% => Don't need to think so much to spend
$10,000 = 0.1% => More thinking before spending
$100,000 = 1% => Better discuss with spouse 1st...

Can also think in terms of Salary. The same % of $100k p.a. is different from $1,000,000 p.a.

I offer another perspective:

For the low income $1000/mth, spending 1% (ie. $10) is probably spending their bus fare or food money. Because probably 90-100% of their income goes to 'necessities'. So 1% is critical.

For the high income (say $20,000/mth), they may spend $5000 on 'necessities' and the rest is for 'extras' like holidays, fine dining, cars, watches (not 1-for-1 replacement, but to add to the collection of 20-30), branded shoes, etc. In this case spending 1% ($200) does not touch their basic food, housing budget. For this group of people, anything from 1% to 25% of their income goes towards 'necessities'. So even if they blow 50% of their monthly income on an LV bag, it's no big deal - they don't even need to discuss with spouse.

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Back to topic: circle of competence. I think if you dip your toes in (buy one lot) and then attend AGMs of the companies, you can get a sense of the industry.

Personally I like Dairy Farm even though I'm not particularly hot about retail. Retail usually has low margins, and retailers are at the mercy of landlords (unless they own their own space, which then raises the question of whether that is the best use of its cash/assets). Dairy Farm seems to be in the retail industry, but it is a retailer like Mcdonald's is a F&B company. If we know the popular example, Mcdonald's is not really a F&B co, it is a real estate co, it is a "system" co, etc. It uses hamburger operations to fund its property and other ambitions.

So actually I see Dairy Farm as a distributor. Any FMCG or supermarket co must compete on the basis of distribution (logistics) network. The idea is to replenish stocks just-in-time. Too slow and your customers buy elsewhere (if I need fruits, I cannot wait 3 days for your supply to come in, I will just go to the competitor, be it NTUC or the wet market). Too fast, and your stocks spoil (perishables like milk, vegetables and meat cannot last). So supermarkets are not really in the business of selling produce. Their main "business" is in supply chain management, getting the stuff from the suppliers to the customers on time, just-in-time, everytime.

To do this, you need scale. With a big warehouse and a fleet of trucks you enjoy economies of scale, and when you are big and have bargaining power with suppliers. Thru scuttle butt I notice that many items on sale in Giant, SnS, Cold Storage are exactly the same. So while each of them may be smaller than NTUC, together they outscale NTUC. You also need a reliable inventory system (IT solution) to keep track of when you fall short of any particular item, and activate stock replenishment. This I learnt from reading about Walmart.

But Dairy Farm the company is also different from Dairy Farm the stock. Dairy Farm the stock has been a multi-bagger because the management is superb at growth. Organic and via acquisitions. They are financial wizards, able to give mind-boggling Return on Equity. http://www.reuters.com/finance/stocks/fi...ol=DAIR.SI

Vested (obviously)