Investing. Pause and think about the word for a moment.
When you think about investing, what picture comes to your mind? Each of us are likely to have our own idea on what investing is about, and what an investor should look like.
For some, investors might resemble this photo:
Most of the people above have at least four screens (either side-by-side or stacked); the overachievers have as many as six computer screens loaded with graphs, rows of data, and reams of information. The numbers that flood the screen are colour-coded, and lean towards the user, waiting to be interpreted.
On the table, we see telephones with so many knobs that you’d be forgiven if you thought that you can launch a rocket from the dashboard, much less a stock trade.
But most of all, the picture screams sophistication, and it suggests a high level of skill is needed to interpret the torrent of data that is flowing in.
Don’t try this at home, the picture says. Thankfully, all these characterizations are also incredibly wrong, in my eyes.
From the Desk of the Oracle of Omaha
Meet Warren Buffett.
Buffett is widely considered to be the best investor of our generation, and he is the Chairman and CEO of Berkshire Hathaway. Between 1965 and 2017, a period of 53 years, his investing acumen helped his company’s book value to grow at 19.1% per year.
For context, the SPDR STI ETF (SGX: ES3), an exchange-traded fund that mimics the fundamentals of the Straits Times Index (SGX: ^STI), produced annualised returns of 7.7% since its inception in April 2002 through the end of January 2018.
The vast difference in those numbers demonstrates Buffett’s amazing investment record in both magnitude and tenure.
And given that, you might be wondering what a stellar investor’s desk looks like…
Well, for starters, you don’t see six computer screens sending tidal waves of data to Buffett’s desk. You also don’t see a crazy-looking telephone that has buttons and dials everywhere.
In fact, Buffett’s desk is pretty simple. There is a scattering of magazines, newspapers, and papers. There’s a normal-looking inbox, and some books on the shelf. In other words, it could well pass as a typical work desk in Singapore.
The thing is, as a billionaire, Buffett could well afford to put the most advanced computers on his desk. But I would reckon that he chose not to, in favour of simplicity. Kinda like his investment approach.
Keep It Simple
In February last year, Buffett revealed in a CNBC interview that his company had purchased billions of dollars of stock in Apple, the creator of the iconic iPhone. At the time of the recording, Berkshire’s share in the tech company’s stock was estimated to be worth US$17 billion.
With such a mammoth commitment, the natural question was to ask Buffett how he came to the decision to invest. For a person of Buffett’s intellect, we might assume that he’d rattle off a series of key figures and numbers to justify the purchase.
But Buffett’s reason was much simpler. He said:
“When I take my great-grandchildren to Dairy Queen, they bring along friends sometimes. They’ve all got an iPhone and, you know, I ask ’em what they do with it and how … whether they could live without it, and when they trade it in what they’re gonna do with it.
[The iPhone] just has that quality. It gets built into their lives.
Now, that doesn’t mean something can’t come along that will disrupt it. But the continuity of the product is huge, and the degree to which their lives center around it is huge. And it’s a pretty nice, it’s a pretty nice franchise to have with a consumer product.”
In other words, Buffett took time to observe why iPhone users are attracted to the device, and why his great-grandchildren kept going back to the same product. What’s more interesting, for me, is that Buffett prioritized this observation over the tons of information that was available on Apple’s business.
A Random Walk Through a HDB
I noticed that a grocery store near my place closed down a couple of months ago. By itself, it’s not groundbreaking news.
But here’s the thing. Prior to the closure, I had the inkling that it would be hard for the store to survive.
It wasn’t because I had access to the store’s financial numbers or balance sheet. Nor was it because I sat through a business strategy presentation with the store owner. And it was definitely not because I had six screens on my desk, filling myself up to the eyeballs with retail data.
The reason was much more straightforward.
As much as I support local mom-and-pop enterprises, the errant store had probably bit off more than it could chew. For starters, the store’s size was similar to that of a convenience store, limiting the amount of goods it could display. The product range wasn’t at all differentiated, or exclusive. Critically, the small store was located a stone throw’s away from a 24-hour NTUC, which had at least five times its floor space.
Said another way, as a shopper myself, there wasn’t much reason to frequent the smaller store. That observation, in my opinion, holds much more weight compared to all the numbers we can analyse.
Such insight as a customer, like Buffett has shown, could also prove to be crucial when we invest.
You Know More Than You Think
At The Motley Fool, we look at stocks as businesses, and not stock symbols.
There are many ways to analyse a business. In my view, the most piercing insight on a business starts with a simple question. With a nod to Buffett, it goes like this: Why would a customer choose a product or service of a business that you are interested to invest in, over its competitors?
Is it the lower cost that captures the customer’s heart? Or is the shopper wowed by the wide variety? Could it be the reputation of the business that sways the customer’s decision? Or like Apple’s iPhone, is its product or service so embedded into the customer’s life that he or she keeps coming back for more? Having this insight is valuable, as it is not something readily available from financial statements alone.
This, I submit, gives us an edge in investing… even without six computer screens.
To be sure, understanding the financials is important — we will need to validate our observations with the actual business’s performance — and our analysis cannot simply end at the simplistic.
But all too often, it seems that the financial industry tries to overcomplicate the essence of that word I started with: Investing. Pay it no heed.
A version of this article first appeared in the 14 February 2018 edition of Take Stock Singapore.
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Disclosure: The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Apple. Motley Fool Singapore writer Chin Hui Leong own shares in Apple and Berkshire Hathaway.