Stock picking and chicken rice

Motivation

The recent stock market turmoil unsurprisingly caught the attention of many man on the street. A friend happen to chat with me and chance upon this topic. She asked whether it is the good time to enter now and if so, what stock should she buy.

I wouldn't comment on the first question. Market timing is an impossibility for mere humans. On the 2nd question, I offered my point of view.

Stock picking and Chicken Rice

If a friend approach you one day and ask you to invest $10,000 in his Chicken Rice stall, assuming you are keen in pursuing this business opportunity, what will you do? Assuming he is indeed a friend you can trust, will you just hand him the $10,000 and wait for him to hand you your share of profits some time later? Or assuming he is someone you just met, will you just hand him the $10,000 and hope for the best?

Most probably you'll choice neither options. A rationale person will at least do most, if not all of the following:

• Try out his cooking
• Check out his chicken rice stall
• Survey the location, the customer turnover potential
• Assess the competition, e.g. how many chicken rice stall in the vicinity
• Discuss the partnership details, profit sharing etc.

In other words, you will want to UNDERSTAND the business you want to buy. All investment has inherent risk and you will want to satisfy and convince yourself this business is worth risking your $10,000 of hard earn money.

Investment vs Gambling

It is completely rationale for one to buy into some business he or she can understand. But when it comes to stocks, why should it be different? If one simply treats a stock as a mere number on the screen when one login to POEMS and buy for anticipation the number will increase one day, what different is this venture compared to driving up to Genting and putting a chip on a number on the casino table? Even buying 'blue chip' stocks this way does not necessary constitutes as investment. Buying one in times of irrational market excuberance will see the 'number' shrink tremendously during bear market with irrational fear.

As Benjamin Graham puts it,

"...An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative..."

Understanding is the key

The effort to perform 'thorough analysis' into any business or investment vehicle before one part with his or her hard earned cash should not be underestimated. It can be tedious, time consuming but nonetheless rewarding. She asked me how I started, what books I read and when I told her I started reading in 2005 and had completed the list of books on the left column (and still reading more), she almost show her disbelieve.

To drive home the point on understanding, one need to look no further then the DBS High Notes 5 issue due to Lehman's bankruptcy. Several blogs and articles had been written on this topic highlighting the plight many conservative investors who thought the product was very safe. They were unaware of the risk involved. Had they actually read and understood the product, they could have done otherwise. Any investment product comes with a prospectus that the potential investor should have read before parting with his or her cash. But how many actually went through those font 1 arcane details? Even if one went through, how many are able to finish and decrypt the wordy lines seemingly meant to discourage understanding?

Conclusion

Invest in something one can understand. If the product seems complex, it is either beyond your realm (I don't think so) or its structured to hide something. Either way, its better be left untouched.