It is often said that buying shares in a company means becoming a co-owner of the company. However, what does it really mean to be a co-owner? After my large investment in Global Logistic Properties (GLP), I finally understood what it means. Usually, for any investment, if the company is not doing well, I could simply sell and walk away. But when I initiated the 15% to 20% concentration in GLP, I told myself that there shall be no exits. If GLP sinks, I sink as well. Hence, I have to understand the business very well and monitor the prevailing risks to protect my investment. Such a mentality requires very different actions from the usual mentality in stock investments. In fact, I differentiate GLP as a business investment as opposed to other stocks which are financial investments.
The first difference between a business and a financial investment is the duration of the holding period. After I had overcome my initial jittery over the stock price fluctuations for such a large concentration in GLP (see My Roller Coaster Ride with GLP), I am prepared to hold GLP for 15 to 20 years or more instead of taking profit in the short term. Having understood the business model of GLP, even a 50% gain in the short term will not be sufficient. GLP has the potential to be a multi-bagger if it is given enough time to develop to its full potential according to its business model. It does not matter if the stock market were to close for the next 10 years. Financial investors make money from the markets, but business investors make money from owning and growing the business.
The second difference is in how financial statements, especially quarterly ones, are viewed. For financial investments, I would read the financial statements, possibly discover some concerns, and sell off the investment the next morning. I once sold off a growth stock (Riverstone) after it reported weaker-than-expected quarterly results, only to see the stock doubled in price. But with GLP, the quarterly results are reviewed to monitor how well the company is executing its business model and plans and what are the potential risks. A set of poor quarterly results does not lead to the stock being sold.
An analogy would be the quarterly exam results of your children. If the child only scored 60 marks for one particular quarterly exam, would you quickly give up on the child, or would you look past the score and delve deeper into the exam questions to understand how well the child has mastered the subject syllabus (i.e. followed the business plans) and which areas has the child done poorly (i.e. what are the risks)? Likewise, a business investment focuses less on the actual earnings figures but more on evidence of business model execution and potential risks.
The first difference between a business and a financial investment is the duration of the holding period. After I had overcome my initial jittery over the stock price fluctuations for such a large concentration in GLP (see My Roller Coaster Ride with GLP), I am prepared to hold GLP for 15 to 20 years or more instead of taking profit in the short term. Having understood the business model of GLP, even a 50% gain in the short term will not be sufficient. GLP has the potential to be a multi-bagger if it is given enough time to develop to its full potential according to its business model. It does not matter if the stock market were to close for the next 10 years. Financial investors make money from the markets, but business investors make money from owning and growing the business.
The second difference is in how financial statements, especially quarterly ones, are viewed. For financial investments, I would read the financial statements, possibly discover some concerns, and sell off the investment the next morning. I once sold off a growth stock (Riverstone) after it reported weaker-than-expected quarterly results, only to see the stock doubled in price. But with GLP, the quarterly results are reviewed to monitor how well the company is executing its business model and plans and what are the potential risks. A set of poor quarterly results does not lead to the stock being sold.
An analogy would be the quarterly exam results of your children. If the child only scored 60 marks for one particular quarterly exam, would you quickly give up on the child, or would you look past the score and delve deeper into the exam questions to understand how well the child has mastered the subject syllabus (i.e. followed the business plans) and which areas has the child done poorly (i.e. what are the risks)? Likewise, a business investment focuses less on the actual earnings figures but more on evidence of business model execution and potential risks.
Because of the differences in emphasis, the questions asked by financial and business investors at Annual General Meetings (AGMs) are also different. It is not uncommon to hear questions such as why is the dividend so low or why has the profit margin dropped in AGMs, but these are mostly focused on the short term financial results. Between quarters or even financial years, there are certain to be variations in the results. Sometimes, the variations might simply be a matter of timing, which will reverse in the subsequent financial period. Long term business investors are more concerned about the viability of the business model and the potential risks. For example, if you are a long term shareholder of GLP, would you not be concerned over whether it is at risk of being disrupted by technological innovations or economic trends, or how it is going to manage rising interest rates and declining renminbi value? These are issues that could threaten the viability of GLP and everybody's investment in it if not managed well. In constrast, how low the dividend or profit margin are for one financial year seem less significant compared to these issues. Financial investors ask questions related to the past (e.g. earnings, dividends, etc.), while business investors ask questions concerned with the future (e.g. opportunities, risks, etc.).
There is also a conflict in what financial and business investors want from their investments. As an example, GLP was recently rumoured to be the subject of a takeover by a group of Chinese investors. Financial investors might be satisfied with a gain of, say, 20% over several months if the takeover were to materialise, but business investors would see a great business and a potential multi-bagger over 15 to 20 years being taken away.
There is also a conflict in what financial and business investors want from their investments. As an example, GLP was recently rumoured to be the subject of a takeover by a group of Chinese investors. Financial investors might be satisfied with a gain of, say, 20% over several months if the takeover were to materialise, but business investors would see a great business and a potential multi-bagger over 15 to 20 years being taken away.
In conclusion, the mentality and actions from being a financial investor and a business investor are very different. It might be a lot more risky being a long-term business investor, but also more rewarding if you get it right.
When we sit on big fat paper profit and collect dividends we are co-owner; if not we are just financial investors. :-)
ReplyDeleteNot necessary must sit on big fat paper profit. So long as we stay invested, monitor the business while collecting dividends, we can be considered as business investors.
Deletecan you elaborate on how GLP could potentially be a multi bagger? what sort of analysis have you done to suggest that?
ReplyDeleteI didn't do any quantitative analysis, mainly because if I plan to hold it for 15-20 years, the intrinsic value at the end of 15-20 years cannot be determined with any certainty. However, I understand the business model and I believe GLP is a long-term growth stock. See The GLP Story for more info.
Deleteit's nice to see your conviction in this investment, but I'd like to share a note of caution. Being a true co-owner allows you to have a major influence over operational and managerial decisions or acquisitions. Unless you own 5% of the company, its not possible to truly act like a co-owner. A 'big investment' to you might not be a big investment to them. The reason why the rich or the big funds are able to concentrate on their investments is because they are able to buy up large portions of the company's stake and have access to management of the company and they may choose to step in when they think that the company is steering off course, i.e Icahn or Buffett. At the moment, even if you have a strong opinion that GLP should be heading in a certain direction, there's so few you can do that enforce that opinion. From my standpoint, as retail investors, we should always focus on things that we can control (capital allocation and risk management) rather than trying to be in the 'big boy' league.
ReplyDeleteAnother thing to note is, the performance of GLP has a positive correlation with the overall real estate market in singapore. Be it logistics, commercial, industrial or retail property development, i think most of us would agree that these are highly cyclical sectors. The SG property market has been in a slowdown of late, macro economic factors both domestic and foreign are major influences in property market sentiment. we could all speculate about the prospects of our property market, but nobody can be truly sure where its heading. If our property market is in for a hard landing, retail investors have very little say on how these property related businesses should restructure. A recent example would be the oil and gas companies in SGX, even the bondholders are left with their pockets dry and are now crying for help.
I hope you're not offended by my words, just wanted to share with you my thoughts. cheers.
Thanks for your thoughts. I appreciate that as I can check if I've missed out anything important.
DeleteYes, you are right to say that retail investors have not much say in how the company is run. However, given my large investment in it, I will monitor the developments at the company and voice my concerns during the AGMs. I've done so at the last AGM and I think management is responding.
GLP has no exposure to Singapore. Nevertheless, I understand your point. The good thing about GLP is that it is not entirely a property developer. It is heading towards becoming more of a fund manager like ARA, which owns very little stakes in the properties/REITs it manage. Thus, most of the risks are borne by the REIT investors rather than the REIT manager. In the meanwhile, it keeps collecting management fees regardless of how the REITs perform.
My top 3 holdings are approximately 15-20% each. Sector-wise, 45% in one, 15% in another. I dont lose slp even when prices fall since these companies have decades of strong performance. There is little to worry about if our major investments are sound :)
ReplyDeleteThks for sharing. Agree with you that there is no need to worry about a share price decline if our investments are sound.
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