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Problem: Separating beaten down good businesses from the pretenders

I was discussing with 2 person I shared investing ideas with that, your view of a business changed a lot when it look really good and when it doesn’t look really good.

A lot of it is psychological. I realize for existing stocks, those stocks that are performing not so well you will tend to find reasons to sell it. This is confirmation bias. You will compartmentalize the pain. And you will find it difficult to add to the position.

By right, you should be adding on at lower prices isn’t it? Since it has a ‘value proposition’. You are suppose to buy when they look ugly.

You can buy 2 kinds of value propositions. The first is the misunderstood growth. People in general think it can only grow like 3-5% per year when after your deep research, they realize with a degree of confidence that the business can do 20% comfortably for a 4-5 year or even longer period. These stocks won’t look as ugly. It is easy to tell your brain that you can buy this. I would consider Super Group, OSIM and Neo Group in this category. Not saying they are, but perhaps people misunderstood their competitive advantage, or how good the management can be to execute.

The second is those that have their earnings beaten down ( you have to be realistic, there are seldom perfect business that are non-cyclical and earnings do not falter. if they are, they are likely not cheap as well!). We are not even talking about stocks in a systematic bear market. This is on an individual company basis.

The problem with the second group of companies is that, the good companies with fixable problems masquerade with the companies you think are good with fixable problems but ultimately may not be fixable. You fear you under research them, and that there wasn’t a competitive advantage at all, or you overestimate supposed good management. Interroller or Pteris in the past seems to be a good example. OSIM and Super Group now that they are in a funk seems to be in that category. My hong kong stock ASR Holdings is also one.Challenger is another.

I came to a realization that there is a competency gauge involved in every discipline you do wealth building. Be it trading, investing in a  portfolio of stocks and bonds ETF or prospecting individual businesses.

If you are starting out in this area of prospecting stocks individually, you may never have bought the beaten down business because you failed to learn that behavioural aspect is rather important. You may ‘punt’ on a beaten down good company that looks like a value stock, perhaps Super Group, or in the past ACCS before their problems, Jurong Technology or in my case Interroller group.

The well versed folks that have learnt a lot may still make the mistakes, but they are likely to filter through more of them since they would have eliminate a lot of the doubts of whether there is an edge to the business and whether the management have the capacity to turn it around, since they really engage in owners that they have stringently checked out. They are likely to put their money in less than 8 businesses instead of a zoo of 20 businesses since they know they can’t keep close track of so many businesses.

Individual stock investing can be a tough job. The behavioural part is something I identified that I have to content with, especially businesses that don’t look so good. Building up conviction and taking opportunities is another. What is your individual business prospecting problem that you face?


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Friday 10th of October 2014

Confirmation bias is a big thing.

People tend to research about the good stuff for the individual stocks they hv on their portfolio. Very seldom they are willing to admit to buying the wrong thing and if everly so probably blame it on the wider economic trauma that the world has caused in.


Friday 10th of October 2014

Hi B too true. Sometimes I realize I suffer from that as well, but I read widely to balance up, end up too pessimistic!

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