Wednesday, March 17, 2010

what does a stock for the long run mean?

the little book that builds wealth was one book that i re-read recently. the book will probably be the skeleton for any future book on singapore stocks, which i truly want to write.
their market beating idea is that you should buy stocks that have strong lasting competitive advantages or what he at calls economic moats ( a term attributed to warren buffet)

for those clueless in investing, just think of a local bank versus bubble tea/roti boy craze. this might be an oversimplified example but it is very instructive. one, banks have high switching costs. it is not easy to open and close accounts at the whims of your fancy. two, while banks might grow as fast as the money supply or local population, it always does what it does best, that is, taking you money and growing it by either loaning or investing. so when you look at that bubble tea or roti boy joint. even in its initial phases, some level of logic will tell you that it has close to no competitive advantage.

without these so called moats, it will be very hard for the company to earn decent returns on its capital. the idea here is simple. if you want to have a portfolio that can grow relatively safely, get those with competitive advantages. otherwise that company will keep sucking money from you through its numerous cash calls etc.

what about again top performers like OSIM, Ezra, Noble and COSCO Corp. in my opinion, there will be limits to most of them save Noble Group. The first two might overextend themselves with their growth plans, something well documented in other people's blog. As for COSCO, it might be sometime before the excess capacity in the system get sucks up.

what about Noble? i think it will hit a limit very soon. but with the acquisition of gluocester, it should mean slightly more upside. i think noble is a stock for the long run even though the commodities boom might have lost steam because the supply chain manager will be the norm, until a better way to handle the logistic issue gets resolve. the internet might have done wonders for the travelling individual, but large scale shipping of physical commodities remain too complex a task for new entrants.

caveat emptor. hope you learnt something.

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