Monday, December 26, 2011

Stocks I don't like

As a value investor, looking to buy solid, undervalued stocks when the markets go into a tailspin, these are the things I avoid.

Technology

Building a sustainable competitive advantage is meaningless in the tech sector, where industries quickly change to become unrecognizable. So I would not buy technology stocks based on low valuations or high market share (e.g.: Microsoft and Cisco today, Nokia several years ago). If I was to buy tech, it would be as part of a growth strategy: in a bull market, with a stock at all times high, with growing sales and their new products that are changing the world....just remember to leave once the party is over: today's hot product is tomorrow's junk....

I also like the idea of avoiding any product/service whose input and output is information (See 'Software eats part of the world'). e.g.: credit cards, newspapers, TV, bookstores.

Change is bad for value investing.


Banking and Finance

Banks are a black box. They make money by lending it out and hoping people can pay back. There is no way to judge the quality of earnings from their cashflow statements. In addition, banking crises occur regularly enough that we can consider them a part of human nature.

So for a long term investor, don't buy when times are good, as the next crisis will hit and drive down the share price of your bank. And don't buy when times are bad, as they can go to zero. Bill Miller beat the S&P for 15 straight years, then in 2009 he "bought ‘cheap’ financials after the credit crunch, but later they got even cheaper". Like Bear Stearns and AIG. He resigned a few years later.

Investment banks are worse, some seem deliberately designed to store risky assets until they blow up.

How do you know which banks are good and which are bad? If Bill Miller and GIC cannot get it right, what makes you think you can?

REITS

I've two main objections to REITS:
  • First, Singapore Reits must payout 90% of their income as dividends. So they are in perpetual debt. Meaning that you are taking for granted low interest rates and access to finance....forever. Ironically, I think they would be better long term investments if they could use their income to payoff their debt.
  • Second, how many REITS bought property at low, low prices during the 08/09 market crash? I cant think of any. A-REIT even made a rights issue at the bottom of the downturn. Some people may even get the impression that REITS are not run to benefit their shareholders.

6 comments:

Drizzt said...

you probably covered all the areas i should be looking in.

tech is a big word since it is so linked up to engineering which is what drives future growth. What if you discovered a company with a portfolio of patents in bio technology?

what if you spotted the next logitech in local firm razor. The difficult job of value investing is to discern within your area of expertise.

there are good reits around. they cushion your portfolio most of the time and the guys who purchase first reit at 40 cent and miif at 23 cents are having sustainable yield on cost of 25%. whats not to like haha.

Createwealth8888 said...

How about Biosensor?

Black Cat said...

Hi Drizzt,

Yes, you're right about tech - maybe the keyword here should be 'change', not 'tech' (eg: AirAsia has changed its industry without any new technology). Not saying I would avoid them (change, or tech), but I would take a CANSLIM approach instead. I think the traditional value approach ("buy stock trading at a single digit PE, at an all time low, and high market share") can kill you in industries undergoing rapid change. Companies which re-invent themselves (like Apple or IBM) are the exception, not the norm.

I really don't know anything about biotechnology...I think its better left to the professionals who understand the products, the business, and (most importantly) spread their bets.

Black Cat said...

Hi CreateWealth8888,

Biosensor makes stents for heart operations (?). I'm afraid I don't know anything about medicine. I haven't been near a hospital for years and hope never to need a heart operation :) Only way I would be able to guess their potential was if I was a doctor or someone 'in the trade'...

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QUALITY STOCKS UNDER 5 DOLLARS said...

One outstanding post.