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25-09-2010, 01:56 PM
Hi All....Good to see this forum up. 
Lets see if we can start a discussion on how we select stocks in the Singapore market. The aim is to write down and quantify the steps used. As methodically and objectively as possible. Writing things down and discussing helps to clarify what we are thinking... Rather than to say...oh, I bought some shares because I like their product, their sales girls dress nice and their annual report is glossy...
These are my stock selection criteria. They are loosely based on the old 'Wallstraits 8' criteria, used for evaluating companies for their future earnings (or FCF).
Lets start with the first.
Sustainable Competitive Advantage
Important when buying a company for its future earnings. To try and ensure that these earnings don't dry up, and the value stock you bought doesn't become cheaper and cheaper...until zero.
What is a competitive advantage?
The most important criteria is *market share*. Ideally, we want a company with the largest market share, among a fragmented pool of small competitors. In time, the largest player should gain an advantage (eg: through economies-of-scale, network effect) and be able to squeeze out or buy over the smaller competitors. Once they reach a certain market share, they gain pricing power.
Avoid situations where the company will also be a price-taker:
- a small player in a fragmented market. Worst case is where you have hundreds of players, each with a negligible (< 5%) market share, and you're company is one of them (eg: unifood. Many SGX S-Chips are like this, the bigger ones all seem to be in HK).
- a company which is in third or 4th place but vastly dwarfed by larger competitors (eg: Chartered vs TSMC).
Don't buy these companies, no matter how low the PE. Every time you're tempted, look at a 5 year chart of Chartered or Unifood. At every step of the way, someone thought it cheap.
We also don't want a company with too dominant a market share - means they have no room to grow (eg: Microsoft).
This is from Porter's five forces (Rivalry and Barriers to entry).
What it not a Competitive Advantage?
Branding: This is subjective. What is good branding to me may be different to you, your wife or your 5 year old kid. Effective branding will show up as high gross margins.... but practically, as a (part time) retail investor in the Singapore market, I've never found a case where comparing gross margins is useful.
Other crap: Every company says they are a 'leading player' in their industry and all their competitors are second rate. Every IPO and annual report boasts of their company's 'experienced' management team. Perhaps they think their competitors are all run by kindergarten children?
How I use it
Since 90% companies listed on the SGX (or anywhere else) will not have any competitive advantage, I use this as a preliminary tool to decide which companies are suitable for further study.
For me, companies fall into 3 categories:
A) Leader: Large market share, lots of small competitors ready to be gobbled up.
B) Significant player. Probably is a large company, and among the top 10 in its industry. May have some larger competitors, but none of them dominate. If the company is well run and profitable, we can conclude that they will still be around for the foreseeable future. SIA Engineering and Venture are examples.
C) Small player in fragmented market. Usually hundreds of competitors, with some significantly larger ones. Will never have pricing power.
Most companies I investigate are are B's. A's are rare. I ignore C's.
Any thoughts? Does anyone have any variations on this?
Lets see if we can start a discussion on how we select stocks in the Singapore market. The aim is to write down and quantify the steps used. As methodically and objectively as possible. Writing things down and discussing helps to clarify what we are thinking... Rather than to say...oh, I bought some shares because I like their product, their sales girls dress nice and their annual report is glossy...
These are my stock selection criteria. They are loosely based on the old 'Wallstraits 8' criteria, used for evaluating companies for their future earnings (or FCF).
Lets start with the first.
Sustainable Competitive Advantage
Important when buying a company for its future earnings. To try and ensure that these earnings don't dry up, and the value stock you bought doesn't become cheaper and cheaper...until zero.
What is a competitive advantage?
The most important criteria is *market share*. Ideally, we want a company with the largest market share, among a fragmented pool of small competitors. In time, the largest player should gain an advantage (eg: through economies-of-scale, network effect) and be able to squeeze out or buy over the smaller competitors. Once they reach a certain market share, they gain pricing power.
Avoid situations where the company will also be a price-taker:
- a small player in a fragmented market. Worst case is where you have hundreds of players, each with a negligible (< 5%) market share, and you're company is one of them (eg: unifood. Many SGX S-Chips are like this, the bigger ones all seem to be in HK).
- a company which is in third or 4th place but vastly dwarfed by larger competitors (eg: Chartered vs TSMC).
Don't buy these companies, no matter how low the PE. Every time you're tempted, look at a 5 year chart of Chartered or Unifood. At every step of the way, someone thought it cheap.
We also don't want a company with too dominant a market share - means they have no room to grow (eg: Microsoft).
This is from Porter's five forces (Rivalry and Barriers to entry).
What it not a Competitive Advantage?
Branding: This is subjective. What is good branding to me may be different to you, your wife or your 5 year old kid. Effective branding will show up as high gross margins.... but practically, as a (part time) retail investor in the Singapore market, I've never found a case where comparing gross margins is useful.
Other crap: Every company says they are a 'leading player' in their industry and all their competitors are second rate. Every IPO and annual report boasts of their company's 'experienced' management team. Perhaps they think their competitors are all run by kindergarten children?
How I use it
Since 90% companies listed on the SGX (or anywhere else) will not have any competitive advantage, I use this as a preliminary tool to decide which companies are suitable for further study.
For me, companies fall into 3 categories:
A) Leader: Large market share, lots of small competitors ready to be gobbled up.
B) Significant player. Probably is a large company, and among the top 10 in its industry. May have some larger competitors, but none of them dominate. If the company is well run and profitable, we can conclude that they will still be around for the foreseeable future. SIA Engineering and Venture are examples.
C) Small player in fragmented market. Usually hundreds of competitors, with some significantly larger ones. Will never have pricing power.
Most companies I investigate are are B's. A's are rare. I ignore C's.
Any thoughts? Does anyone have any variations on this?
I wait until there is money lying in the corner, and all I have to do is go over there and pick it up.
Jim Rogers
Jim Rogers
