As I write, there are 900+ stocks listed on Bursa Malaysia. Here’s a question. Which stocks are ones that would grow in value? Which are ones that don’t? Thus, before investing, I believe it is necessary to have a system to sort out good quality stocks from others of lesser quality. This system must be easily executed, yielding consistent results and replicable in multiple markets.
This takes skill.
And, the #1 skill to build such a system is ‘The Skill of Reading Financial Statements’.
If you are reading this, perhaps, you may begin to feel overwhelmed. This is true especially if you hate numbers. You may perceive that this skill is only for maths whizz and financial guys. Trust me. It is not as complicated as you think. This skill is extremely learnable as it requires basic primary school mathematics only.
On Tuesday, we had Rusmin over to share his insights on finding good stocks in our webinar. I believe, his sharing is spot on and resonates to how one should invest in the stock market. Here, I’ll cover three things that was inspired from the 1-Hour Live Webinar session.
#1: Why Read Annual Reports?
‘If you get interested in a company and you read its annual reports, you will have done more than 98% of the people on Wall Street.’ This is a quote by Jim Rogers, a true living legend in the world of investing today. It is priceless and many who follow this piece of advice have profited handsomely from their investments. Needless to say, this includes Rusmin, KC and myself.
Regrettably, most people do not read annual reports. Some believe, it takes high intelligence, inside information, tips, feng shui, ‘Kang-Tau’, luck or a combination of them to be successful in stock investing. That’s not true. In most instances, they are not investors but speculators who sincerely believe that they are investing. Unfortunately, most lost money or fail to achieve consistency in returns as they are bad speculators themselves.
In contrary, savvy investors have a habit of reading Annual Reports. It is good enough to segregate stocks that are good from others that are bad. Rightly so, it can be viewed as a ‘Passport’ to financial freedom and wealth creation, at least according to Rusmin. Personally, reading Annual Reports has been a transformation process for me. I believe, both Rusmin and KC would agree that, it is the best way to develop acumen in stock investing.
#2: Read Multi-Years Reports
Here is my personal objective as an investor. I want to know whether a stock has built a track record of growing profits in the past, still profiting in the present and has a tangible plan to sustain growth in profits in the future. It is an assessment of the past, present and the future of a stock’s existing businesses which are in operations today.
As such, I believe it is insufficient to just read the latest annual report of a stock. Having short-term perspective is not enough for me to conclude an investment decision. It’s better to have both short-term and long-term views on a stock. Personally, I read up to the latest 5 – 10 years publication of a stock’s annual reports. For Rusmin, I’ve learnt that he’s more hardcore as he reads even more than that. Certainly, Rusmin has my salute and perhaps, this explains why the financials presented are multi-years instead of a single financial year.
#3: Why Cash Flow Statements?
This is crucial but extremely neglected by most investors. It is the cash flow statement. Awesome.
Here’s a frequently asked question. What is the difference between profits and cash flow? Let me explain.
Let us say, a stock received an order in 2016. It fulfilled its work and the customer has acknowledged its work done. Thus, the stock billed its customer for the work performed. As such, the stock was able to record sales and profits in 2016. However, if the stock fails to collect cash from this customer, the stock records it as a receivable in the accounts for 2016.
In 2017, the stock receives cash from its customer. Then, the stock records the cash received and cancels its receivable in 2017. If the stock fails to collect cash, then, it remains a receivable. If the customer became bankrupt, the receivable is treated as a bad debt if the stock has doubts on collecting cash from its customer.
The Rubber Meets the Road
In this article, what I’ve shared so far is just the tip of an iceberg. Rusmin has imparted tremendous value as he discussed:
– 5 Key Figures of a Winning Stock
– Patterns of a Winning Stock
– Growth Traps that Savvy Investors should avoid
– Red Flags of Fraudulent Companies
– Case Studies & Discussions on Real Stocks
Over dinner, I’ve learnt that Rusmin and his team are avid attendees of Annual General Meetings (AGMs) of stocks in both Malaysia and Singapore. For noteworthy ones, they penned down their findings and made them available on their digital magazine which is the Fifth Person.
Personally, I do read them especially the ones which I have invested into. As I write, the Fifth Person has already built a collection of AGM coverage. Who knows? Your stock might be included in their collection. To find out, click the link below: