How grim can things get? Everywhere we look we are surrounded by bad news and increasingly so! This is an opportune time for investors. Speaking of investors, this week I would like to define investing versus speculating and the best place to start is the recent reporting season.
Of the top 300 stocks listed on the ASX, 50 of those companies generate no profit whatsoever, yet they account for over $60 billion in market capitalisation. That’s scary but it gets scarier. Of the 2144 stocks listed on the ASX in September 2022, less than one third actually make a profit. Further, two thirds of companies listed do not have sufficient revenues to meet their ongoing business operating expenses, meaning they need to rely on capital raisings by investors to keep trading. You may have heard the term “burn rate “used in the media where they calculate the amount of capital they have left and the time they have to achieve a defined percentage of market share. Why does market share count you ask? Well, the percentage of market share may well attract bigger fish to consume the smaller fish. The problem is that every time you do a capital raising you dilute the value of the existing shares. People who invest in these types of companies are speculators or investors – you be the judge.
Venturing further, 94% of companies that go to a listing do not last. They either fold and go into liquidation not being able to meet their debts, they run out of capital and have to delist, or they are taken over. Some are taken over like Afterpay for an incredible premium, but the vast majority are taken over at very low share prices relative to what they listed at.
So, buying into these companies is easy to do – usually two clicks away. And people buy into these companies every day usually on a tip from a friend or an associate who is “in the know.” In the majority of cases people do not do their research. They buy on the premise that like a casino, they will be able to purchase and then sell again to a more gullible speculator at a higher price further down the track. We witnessed this in the recent property boom where speculation was rife, and people were buying off the plan or site unseen.
The message I am conveying is that without research and analysis you are a speculator, not an investor. An investor will define a business by the quality of its management, the sustainability of the business’s cashflows, their ability to manage an appropriate amount of debt and whether the company’s business proposition is economically defensible i.e., they operate in a space that has high barriers to entry. The best investors I have been privileged to meet have been those who seek to own companies with sustained business performance regardless of business cycles. They seek to hold these exceptional companies for long periods of time as long as their performance remains exceptional. They have done their research and believe in the long-term company prospects and want to own a slice of the company for the long term. They take advantage of the market’s moods at times like now when sentiment is grim and are not swayed by market sentiment. Even in good markets they may seek to top up their holdings if they remain convinced of the future of the company.
If you are not prepared to do your own research and analysis, then make a decision to “turn Pro”and invest using some of the quality investment teams we have researched and partnered with over thirty years. These people eat, drink and breathe what they do every day. That is why they are able to produce sustained performances over many years. Then you become a professional investor, rather than a DIY investor.
Additionally, this month Future Gen Solutions are on a Mo-Mission for Movember!! From 1st of November until the 30th of November our team will be raising funds and growing mo’s and awareness for all the dads, brothers, sons, and mates in our lives. We need your help! Please donate to support men’s health!
Tom, Jeremy and Simon will be growing Mo’s while Lili, Nicola & Michelle will be walking the distance in support of Men’s Health over the month of November.
Future Gen Solutions Team Donation Link is below or simplify scan & Donate via QR Code
Ready – Set – Mo
If anything in this article has got you thinking, please feel free to contact us.