2016 is drawing to a close and it is an opportune time for me to reflect on my blog for this year. Regular readers of my blog would know that my blog posts this year have tilted towards understanding the business of the industry/ company. This is most clearly manifested in the series of 14 Oil & Gas posts and a couple of sporadic posts in banks and Global Logistic Properties (GLP). This tilt towards business analysis is also reflected in my investments, with selective positioning along the O&G industry chain and a big investment in GLP.
This shift towards business analysis as opposed to financial analysis has yielded advantages. Previously, being trained as a value investor, most of my investments were solely based on analysis of the financial statements, i.e. the company must have good earnings, low debts, strong cashflows, etc. However, the issue with financial statements is that they reflect the past business conditions, not the future business conditions that drive stock prices moving forward. It is like driving with the rear-view mirror. Thus, many times, I would buy into a stock with good earnings but whose price is declining, only to end up with declining earnings and further declines in share price later. This is most clearly epitomised by the misadventures in O&G stocks in late 2014.
With business analysis, past financial statements are only an input for understanding the business of the company and constructing a business model for it. They are a means to understand what factors drive the revenue and costs of the company. Using this model, you can feed prevailing news about the economy in general (e.g. rising interest rates), industry news (e.g. OPEC cutting oil production) and company-specific news into the model and forecast how future financial statements would look like. This way, when the next financial statement is released, you would not be surprised by the earnings report. Also, the next financial statement is used to check how accurate your business model is and make the necessary adjustments. It is also used to check how well management has executed their strategy and business plans and understand what are the potential risks. Financial statements are a means to an end and not the end itself.
Having said the above, I have actually not carried out an in-depth business analysis of any company in my blog. What I have done is broad-level analysis of industry groups instead, as a single industry analysis can provide a quick understanding of many companies in the industry. A blogger who has done in-depth business analysis of companies very well is SG Thumbtack Investor. Looking forward to 2017, I hope to carry out more business analysis for more industry groups.
Thanks for staying tuned to this blog throughout the year. Wishing all readers Merry Christmas and a Happy, Prosperous and Healthy 2017!
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