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Analysis & Learning

The art of common sense investing

January 30, 2021

A share is exactly what it says, a small piece of a business. The difference between you and the CEO is that he usually has more shares. These days he may have many more shares amounting to a sizeable piece of the businesses because so many companies are run by the founders. We no longer think of the CEO or even executives on the so-called C-Suite (top management) as hired hands but fellow owners, who also happen to be running the business. Very often most of their remuneration comes via share stakes and options rather than salaries, which can be surprisingly modest.

If you hang on to that idea of a share (or a CFD or even a spread bet) as being part ownership rather than some mystical financial instrument then it quickly becomes obvious that the thing you want to own is a piece of a good business, ideally a very good business.

I think most investors do realise that but they then confuse the issue with a whole raft of other considerations. Are the shares cheap or dear? Is the whole market cheap or dear? What is going to happen to the economy? What about inflation and interest rates and the election and the roll out of the Covid vaccine and the possibility that Iran or North Korea might have nuclear weapons, which might lead to tensions with the US, which might affect the stock market and so on and so on?

Maybe it is because novice investors think they need to have the answers to all those questions that they find the idea of investing so daunting? The truth is you don’t need those answers (a) because nobody has got them and (b) because even if you did have them there would still be no guarantee that you would take better decisions.

My approach to investing has become very stripped down over the years. I really just want to know one thing. Is this company a great business with exciting growth potential? If it is, I want a piece of it and once I have got that piece I will keep it until it is clear that it is no longer a great business. If it is not a great business with exciting growth potential, I won’t touch it.

Just in case that still seems to leave things complicated I have another simple rule. Not only am I not afraid of the obvious, I positively like obvious. So if rule one is only buy shares in great businesses, rule two is – if it is not obvious that it is a great business, it isn’t; that saves a great deal of exhausting and ultimately fruitless cogitation.

It is a key reason why I am able to identify exciting shares so quickly. I know what I am looking for and long experience and maybe some sort of knack helps here but ultimately, if it is not rapidly apparent from the numbers, the share price behaviour and the things the top management are saying that the business is exciting, I move on.

I miss a few with this approach but I also spot a lot, often early in their climb to great success. Netflix is presently trading around $555. I first recommended them at $8.48 (price adjusted for subsequent share price splits) and at that time CEO, Reed Hastings, was as gung-ho on prospects for the business as he is now.

Among more recent stars I first recommended Shopify at $75.20 in April 2017. They were $35.50, when I first put them on my watch list. The latest price is $1,185. More recently still, I recommended shares in Hong Kong-based stockbroking and wealth management business, Futu Holdings, in July 2020 at $29.40 and five times since and the latest price is over $114.

What these shares and the others featured in Quentinvest have in common is that they are all what I call 3G (great chart, great growth, great story). This may sound complicated but again it boils down to common sense. I don’t spend hours, or even minutes, analysing share price charts. What I am really looking for is a strongly rising share price. If it isn’t going up strongly (a) why bother and (b) I become very suspicious if I think that I am the only person who knows the story because that never happens.

Great growth is also obvious. It doesn’t have to be profits or even sales, though it usually is but some metric important to the performance of the business has to be rising strongly. If nothing is then again, why bother.

Last but not least and arguably least obvious is great story. I have an advantage here because over the years I have studied thousands of companies and interviewed thousands of top executives. It is likely that this has given me a nose for a great story but even so they are usually pretty obvious. If you can talk to the CEO, which I don’t do anymore because it is all available online or read the annual report and you still don’t think the company is exciting, it most likely isn’t.

An even simpler rule is – are the top management excited about the performance and prospects because if they aren’t why should you be. It is not so much that I am a better analyst than you that I find so many great stocks. It is more than it is my day job. I spend more time looking and I know loads of short cuts to help me in my search.

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