Follow a stock like a storyboard

Look at a company like a storyboard. The story will develop as it goes. Do you like current story? If the story line (business) remains about the same for next few years, you can get the idea what the result (earnings) will be. That provides you information to make investing decision. If you have some doubt in the story, stay away for now and come back to read it again some time later. If the result is what you like (larger business and larger earnings), then you may want to invest in the company. You will need to follow this storyboard from time to time (every 6 months, certainly not every day monitoring the share price). This means checking if the company’s earnings potential has been materially impacted by certain event (not checking the fluctuating share prices, and by the way, checking share price is not counted as following the storyboard).

If the storyboard remains as attractive, then you may stay invested. If the story gets more attractive, increase your investment. If the story gets worse, decrease your investment. The fluctuating share price is merely there for you to take advantage of. If the story remains attractive, but the share price falls substantially, then you may want to invest more. So, look at this storyboard detached from the share price.

Buy-and-forget strategy on specific stock is dangerous. You may say if you bought Apple 10 years ago and forgot it, you made 24x your money today. True. Apple was worth about $30 billion 10 years ago and now worth $741 billions. But, 10 years ago, you could have bought Blackberry, the leading smartphone maker at that time, especially within finance industry. Blackberry was worth nearly $34 billion that time, but now worth $5.5 billions. A whopping 84% fall in share price in 10 years.

By following the storyboard, you may not be able to detect any big problem immediately and sell before the share price falls. But, at least, you know what’s going on in the company (has it made bad investment? what hurts the margin? is it temporary or long term? have competitors caught up? is the earning gain due to one-off item such as asset sales?) If there is a sharp price rise or fall, you know if it’s driven by certain event instead of a mere normal market move.

What you want to achieve with this 6-month check-up is to find out whether the stock is still attractively priced relative to earnings. In order to do that, you will need to find out what is happening in the company to make the earnings go up.

If you do want to use buy-and-forget strategy, it’s better to apply it to index fund. It’s diversified basket of stocks to represent the market. If you put in an effort to pick an individual stock, then put in additional effort every 6 months to follow the development.

How to follow the story? 

1. Read the half-yearly interim report. Usually, the company has a presentation slide to help investors better understand the business performance.
2. Get a few copies of research reports from sell-side analysts. You can call your broker to ask for that. For popular stocks, sell-side analysts cover the stories closely, so the reports will tell you the latest development and facts. You may not want to believe all their earnings forecast or their price target as they generally tend to be bullish. But the reports are useful to get the recent developments and a summary of their meeting with the management.
3. For some easier to understand business, such as restaurant chains, you can follow the story by visiting the restaurants and from daily observation of the crowd and feedback of customers in the restaurants
4. If you know the business well, then you should know other resources to check out. For example, if you are a doctor, then you may be aware of certain new drug that gets approval recently and can start contributing to the company’s earnings.

Think about why you invested in the company in the first place. Then, during 6-month check-up, review if the reasons remain valid.

 

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