Welcome back future investors!
In Part One I provided you with data evidencing the performance of the Jamaica Stock Exchange over the years. In Part Two I explained how on some level everyone can make decisions about which stocks to purchase based on their everyday purchasing choices. So, now it’s time to evaluate what makes a company worth buying.
There are two questions everyone needs to ask before purchasing shares in a company:
Whatever this company is doing (be it providing services or selling products), will there still be a market for it in ten years?
This question helps investors to evaluate the longevity of the company. If the expectation is that there will be a future demand for whatever this company is doing, then the belief is that, this company will be around long enough to benefit shareholders. If you believe that this company has little future worth and not much opportunity to reinvent itself then there may not be considerable future value in this company. What you are looking for is a company with a sound business model and the capability to stay relevant by reinvention (if necessary). Let’s take for example two companies currently listed on the Jamaica Stock Exchange:
- WISYNCO — We know that their products do well locally. Almost every office that you walk into someone is drinking a bottle of Wata or CranWata. They have tremendous potential to expand even more aggressively to markets like America, Asia or even the wider Caribbean.
- KINGSTON WHARVES — The buzzword for this century seems to be logistics. KW sits on the seventh largest commercial harbour in the world. One’s belief may be that this company will have future value given its positioning.
Let’s go overseas for a minute. AMAZON’s average share price in January 2008 was US$77.70. Despite the economic crash of 2008, AMAZON’s business model seemed future proof. As the world became increasingly more connected the idea of a global online retail hub was future proof. As at September 19, 2019, AMAZON was worth US$1,821.50. That is a percentage increase of 2,244.27 per cent in a little over eleven years.
If your answer to question one is yes, then it should lead you to question number two…
How easy is it for a competitor to do what this company is doing, do it bigger and do it better?
This question is not so much about the relevance of what the company does, but seeks to assess its ability to maintain market share. Let’s reflect on my analogy given in part two. In part two, my client told me that he prefers Grace corned beef because that’s the brand he grew up on and it always tastes the same. This response not only spoke to the quality of the product being offered by Grace but also to the perception of the brand amongst customers. Whereas hypothetically, another company could tomorrow make corned beef that may rival the taste of Grace, it would be difficult to compete with the brand perception. Not impossible! Just difficult!
There’s no real foolproof way of buying stocks but as Sir Buffet puts it…
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”
Remember what you pay for is price, but what you get is value. And value always wins in the end! So put your money in companies that you believe will continue to have good future value.
See you next week!
— Monique Wilson holds a Masters in Business Administration from The Edinburgh University and has over twelve years of experience in the financial market.