Probably the most frequent question I am asked about buying shares is where do I find my investing ideas.
Do I, for instance, use some fancy filter to screen the vast array of available shares on the market for prospective purchases? Or do I furtively steal a glance at charts when I think that no one is looking over my shoulders?
Then again, do I spend hours on end scouring the many financial news channels on TV for ideas about what is currently hot?
It is none of the above. In fact, I have never really given the matter that much thought. That is, until fairly recently.
Two wooden trunk boxes
My "Aha Moment" came when I was fortunate enough to attend a reading of "Two Wooden Trunk Boxes" at The Arts House by renowned author Zhou Can.
The prolific Chinese writer together with academic Dr Tan Chee Lay, were discussing the inspiration behind his seminal work about two very old wooden cases.
What I found interesting was that different people will take away something quite different after reading the same piece of prose.
For me, it seemed fairly straightforward. It was about owning something that was considered by many to be old and ugly that has over time become something beautiful and valuable.
Investing for me is a bit like Zhou Can's "wooden trunk boxes".
When ugly is beautiful
When I invest, I specifically look for ugly and unwanted shares. Some people might call that value investing. But for me it is simply about looking for quality shares that are unloved and, consequently, likely to be undervalued by the market.
Investing, in my book, should never be about buying into the latest fad. Warren Buffet once said: "Most people get interested in stocks when everyone else is".
But he went on to say: "The time to get interested is when no one else is. You can't buy what is popular and do well."
Buffett is essentially warning people to steer clear of popular stocks and the latest investment craze. His advice applies not only to specific shares but also for sectors and geographic regions too.
The secret to successful investing is about buying undervalued shares in businesses that you understand. Your understanding should ideally go beyond a superficial knowledge of the business too. It is vital that you delve deeper into the ways that the business makes money.
Let me explain.
Back in 2009, banks were massively unloved. That applies to not only banks here in Singapore but also elsewhere in the world. But it is precisely because they were unloved that investors should have looked more closely at the sector for their investing opportunities.
Look forward, not back
For instance, in 2009 DBS Group was valued at around 40% below its book value. At the time, the shares were trading at around S$4 a pop because not many people wanted to own them.
Today, those same shares would set you back around S$9.50, which values the bank at a 30% premium above its book value.
You might, of course, point out that hindsight is a wonderful thing. But investors with foresight in 2009 would have realised that Singapore's biggest bank, which was trading at a significant discount to its book value, was a steal.
Peter Lynch once said that you can't see the future through a rear-view mirror. He is right.
Investing is about looking forward, not back. And currently I can see at least half a dozen sectors that are unloved. Can you?
Foolish best
David Kuo
Director, Motley Fool Singapore
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