Sustainable businesses. Superior businesses. 

Apart from taking care of my community, I am a full-time investor. While it does provide me with a lot of freedom, I impose upon myself to utilize my time properly.

Many people asked me what is my goal of creating this community? It is a way for me to share my knowledge in a group setting. On top of that, I wish to build a global group of investors that focuses on high-quality companies. While the early traction is slow, this is something I will build long-term.

Part of my schedule involves chatting with investors whom I admire, respect and learn from. I try to speak to them, gather thoughts and distill down into key learnings.

There are quite a number of activities this week.

Pro-bono Portfolio Review

If I do not know what I am talking about, I will tell you upfront that either I need to find more information or this is not within my area of interest/competence. Through time and other outreach, my friends trusted me to look through their portfolios. You need to have a portfolio strategy and do not invest your money into stocks that do not produce any value. This is what I termed in my previous article called Dead Money.

I have to qualify that I am not into any advisory role, I am not a qualified adviser too.

To prevent dead money, it is very simple. Do expect your company to grow at least 5 – 10% revenue growth, but more importantly, the bottom line has to grow as well. Do not invest in companies with deteriorating profit margins. Look at the dynamics of the business, does it have a fair chance to succeed? Look at the returns to the shareholders. Is the management pro-growth or complacent? All these are what I taught in my course.

I’ve spent some evening time to look through portfolios of three individuals. Through their sharing with me, I distilled down a few lessons.

• FOMO mentality kills you. When people tell you certain stocks are good, exercise some thinking and ask yourself, is it really true? Many people bought stocks without any understanding about the underlining business.
• Do a quick check on its recent quarterly results. It tells you the entire picture in a quick minute.
• Understand what you’re investing and have the courage to average down when the opportunity arises.
• Don’t concentrate too much into a particular geography or sector.
• Many people feel that numbers are important. I totally agree with them. However, the MOST critical thing is business models.
• Most people are just as clueless but they pretend to know everything. At the end of the day, it is way better to listen to yourself.

(I could be typing rubbish to you all these while! Don’t believe me too.)

Try not to buy everything you see, be very selective in what you buy. In the past, I get excited when I have 10 – 15 ideas per year. These days, I am happy with 3 – 5 great ideas per year. In every instance, quality produces permanent wealth.

Even top poker players do not gamble their money, they have their game plan and strategy.

I tell all of my friends a simple truth.

Many companies get listed to raise funds for their operations, they do not get listed to make wealth for you. Don’t think that all listed companies are good companies. In the universe of SGX stocks, half of the listed companies are not profitable. If you narrow down to capital compounders, there are a handful only.

You see, I was chatting with a staff of my portfolio company, he told me, most companies run up, then fall back and fade away. That is so true. Focus on a few key ideas and you’re going to do very well in your life. Skip those cyclical and financials.

To put things in a most extreme manner, here’s what Charlie Munger did! I can’t… haha!

“I read Barron’s for 50 years. In 50 years I found one investment opportunity in Barron’s out of which I made about $80 million with almost no risk. I took the $80 million and gave it to Li Lu who turned it into $400 or $500 million. So I have made $400 or $500 million reading Barron’s for 50 years and following one idea. Now that doesn’t help you very much does it? I’m sorry but that’s the way it really happened. If you can’t do it… I didn’t have a lot of ideas. I didn’t find them that easily, but I did pounce on one.” -Charlie Munger

The Traits of a Superior Company

Before I share this topic, I have a book recommendation.

Check out Value Migration: How to Think Several Moves Ahead of the Competition by Adrian Slywotzky.

It shows you how new business is created and they steal away huge market share from obsolete business models. Think about how iPhone stole so much market share away from Nokia/Blackberry. Or Facebook receiving the huge value flow when businesses ditched newspaper advertisements and shifted to digital.

Ok, let’s come back…

Why do some businesses have the ability to charge high and customers buy from them?

It has to be the value created for the customers PLUS the fact that there are no substitutes for the end-product or service. By the way, if a business decides to overcharge a customer and does not provide the value expected, it is not a sustainable business.

It is a win-lose value proposition.

Superior businesses do not compete on prices, they compete on value.

If I am selling you something at $100,000, it is expensive. But what if this $100,000 is able to save you over $500,000 in business cost?

If I am selling you something at $50,000, it might be cheaper. But it is an inferior product that may not meet your expectations.

Where does a customer’s bargaining power come from? It comes from the fact that there are several substitutes in the marketplace. When there is no direct substitute or comparisons, the company’s products or services become the only solution to meet the customer’s needs. This shifts the pricing power to the company. But knowing that, it is not right for the company to charge excessively. What is excess? It is a subjective discussion.

The presence of substitutes mean your product has a low barrier to entry, nothing proprietary, and easily duplicated.

I like what Terren Peizer, known as “Zelig of Wall Street” said:

“Invest in situations where you tip the playing field in your favor and Invest in companies with low market caps but with the ability to change the way its industry does things.”

Apple created a new way of how we use our phones.

Microsoft created operating systems.

Costco changed the way we shopped.

Facebook created a new way of targeted advertising. Unprecedented.

Align Technology changed how orthodontics treatment is being done.

Look at Align Technology’s gross profit margin, since FY2007 til today, it is 74-76%.

Why can they hold on to their margins so well? No one can do what they do.

They are always close to their customers and they are customer-obsessed. They hear and receive feedback from their customers. Look at the classic case of Amazon.com. It’s what helps them keep ahead from their competitors.

No one can come near them because no one can offer a competing and viable product/service at scale. When there is a lack of competitor, the size of the opportunity is massive once customers adoption rate scales up. So, if a company is able to offer such value, customers love it, no other competitors can replicate its capabilities, then we have a winner.

Moats are the after-effects. Companies are not born with moats, moats have to be created by the products.

I always focus on the products first. Is it value-adding?

Facebook couldn’t have had a network effect if their platform did not provide a superior way to connect with different audiences.

Costco couldn’t have had an efficient scale if not for their conscious decision to pass down savings and grow the volume.

It’s the end benefit to the customers.

Sustainable businesses. Superior businesses.

They create their own markets.

It’s okay if we cannot find such businesses, try to find as close as possible.

Any company whose earnings are growing consistently – or more people, are likely to grow consistently – has something unique about it. What is uinque is always the same thing: it is people, the brains and talents of people, sometimes they produce patents, sometimes they produce a reputation for service, but always they produce something that cannot be easily duplicated by anyone else.

My Workshop

I conduct talks once in a while as a form of outreach and it is an opportunity for me to meet people. If you’re keen to connect, drop me an email at kelvesy@gmail.com. I’ll invite you to my workshop!

Ending

These days, I am starting to see how the world is changing. It’s incredible. There are many jobs turning obsolete because of advancement in technology. It’s either we upgrade our skill sets or we may lose our relevancy in this world. The best way is to future-proof ourselves. I find investment as my preferred way to do so. Despite the world being transformed many times in the past decade, investing is still a top skillset that allows one to generate passive income and grow your asset. Create your own safety net.

I will not let disruptions control my future, I will control the trajectory of my life and design my life. Always put yourself in a position where you’re ahead of the curve.

I’ll end off my post with this from Harsh Goenka:

To be great:
1. Always do your best. Make the right choices. Learn from your mistakes.
2. Treat others with respect. Always conduct yourself with grace.
3. Concentrate on your character rather than reputation.
4. Be compassionate.
5. Be consistent in your words and actions.

As always, I’m grateful for all the readers who have reached out to me. I love listening to your stories. Do connect with me! Cheers!