• Money Management
The above 3Ms are applied to you, the individual. Things which you are in control of. I have come up with the 3Ms of investing which are equally important but they are things which are beyond your control and which you should also think about when you invest.
Today I will write about the 3Ms of Investing and one of which is a lucky "M". See if you can guess it before you read futher down...
For long term investing, you need the following 3Ms
First M - Management
I don't think I need to spend time on this. You know the importance of management. With a good management, you can trust them with your hard earned money. There are many examples of why good management is important. Apple got a new lease of life when Steve Jobs returned. Berkshire Hathaway's Warren Buffet invests only in companies whose management he trusts. Good management creates value and bad management destroys it.
Second M - Macro Environment
The second M is the macro environment and trends which the company is in and that affects the Company no matter how good the managent is.
NOL and SIA were in doldrums because of the competitive macro landscape in which they are in. The share price only got a reprieve and went on a rally when the oil prices crashed. It doesn't mean the fundamentals have changed but a cheaper oil price definitely will help.
Li Ning and other offline retailers in China suffered when the retail trend and habits changed. The new generation took online shopping with Alibaba to the next level and brick and mortar retail stores started to bleed. The anti corruption drive also impacted luxury dining and retail, so in that regard, do take note if you are currently exposed to such companies in China (maybe Osim?).
Similarly Sony Ericsson, Nokia and Blackbery couldn't react fast enough to the changing competitive landscape caused by Apple, Samsung (and now Xiaomi) smartphones.
Third M - Mulitple Expansion
This M can be your lucky (or unlucky) M. It doesn't depend on you or the management. It depends on the market. Let me give you a simple example.
Assuming a company has $70m profits in year 1 and the market gives it a multiple of 10x PE. That translate into a market cap of $700m at end of year 1. The company still makes $70m at end of year 2 but the market sentiments have somewhat improved and investors start to be more bullish on its future prospects in general. They decide that a fair value of 20x PE is more appropriate and because of that, the company now trades at $1.4 billion market cap.
Without any change in anything, the company is now worth twice as much "magically". This is called Multiple Expansion.
In a lot of cases, you never understood why or bother to find out which component contributes the most. Let me give you a simple example, Breadtalk.
I am not sure you noticed that Breadtalk is now trading at multi year high and at a PE of more than 30x (if I recall correctly).
It is a combination of good management, favorable macro trend of rising affluence and multiple expansion. You can actually compute the effect of multiple expansion. Just use the latest EPS and multiple by the difference in PE multiple from one year ago. That will give you the "wealth created" to you by the lucky M.
Why do some sectors such as healthcare have a higher mutiple versus others such as the construction sector? Can anyone control this? Probably not. You just have to "thank your lucky stars" when you benefitted from it.