Value Investing Asia: March 2013

How to judge whether a company is worth investing in

by Cathy Rose A. Garcia, ABS-CBNnews.com
Posted at 03/28/2013 11:45 AM | Updated as of 03/28/2013 11:45 AM

MANILA, Philippines - Investor Warren Buffett is the fourth richest man in the world according to Forbes magazine, with a net worth of $53.5 billion. The so-called "Oracle of Omaha" didn't become a billionaire through sheer luck, but by following the strategy of value investing".

Buffett is perhaps one of the most famous proponents of value investing, which he learned from the "father of value investing" Benjamin Graham at Columbia Business School.

With Buffett's success in value investing, one would think many more would be following his lead.

But Vandermir Say, a chartered financial analyst and a value investor, said it's not widely practiced in most markets, including the Philippines.

"Perhaps because it entails analysis of a lot of annual reports. From the Philippine perspective, when you go out and ask market participants if they read annual reports, most of them will say they don't," he said in an interview on ANC's On The Money.

Say emphasized the importance of reading annual reports of companies before investing in them.

"Reading annual reports is just like taking a blood test. If you want to look into someone's health, you have to take a look into the body and look at the records and numbers to see how he's doing. If you're not digging into a company, the business the numbers or figures, whether it has debt or not, it's hard to tell whether the business is good or not," he said.

Say said investors should look at a company's financial performance in the last five or 10 years.

"How would you know what's the cashflow of a business or will be? Essentially, the only way you can do that is looking through annual reports. Looking at the history, like PLDT, Meralco, you can see their income figures in the last 10 years. These would be very good indicators of how they're going to perform in the future," he said.

Value investors pay close attention to the income and cashflows. "We look at the past historical records to show us what they have done and from there we can understand what they can offer in the future," Say added.

Another important detail that value investors keep an eye on is the company's debt. Say noted that if you look a two companies' stock price, everything make look the same, but if you flip through the annual reports, you will see which one has debt.

Value investors are in it for the long term when making any investment. Say noted value investors like to say: "In the short term, the value of the market is a voting machine. In the long-term, it's a weighing machine."

"It's like voting - more buyers, the market goes up. More sellers, the market goes down. We don't play that game. In the long run, it's a weighing machine, it depends on the business. Does the business have good values, good cash flows, sustainable business model, competitive advantages - those are what lasts and determines the value of the stock in the long run," Say said.

http://www.abs-cbnnews.com/business/03/28/13/how-judge-whether-company-worth-investing