Lets move further indepth into understanding how to analyse a stock to decide if we would want to invest into it.
First things first, Stocks are Businesses! Remember we are not speculating if a stock price will jump up, we are analyzing the stock as a business to see if this business is worth investing in.
The first question we want to ask about this business is if it has an Economic Moat.
Imagine the world of business to be somewhat like a battlefield where it is war daily. Each business is trying to beat the other and win over market share. As such, the business we want to wisely invest our money in, should be one that has an economic “Moat”. This Moat is a certain advantage that can help it withstand attacks and economic downturn. Inevitably, the world economy has a cycle, booms and busts. We want to find out if the business we are interested to invest can thrive during booms and survive the busts. We also want to know if the Business’s model of profit is sustainable in the long run. To help us, we can use the STEP analysis. (I would like to give credit to Professor Joseph Wan Chew Yoong from NTU Nanyang Business School who taught me this when I was an undergrad. Hmm, the schools did teach me something…)
(Note that the original term for this analysis is known as “PEST” analysis used in Marketing and Business, but Pro Joseph dictate that he prefer to be more positive and use “STEP”)
Social Cultural – Ultimately, a business exist because of it’s ability to serve value to customers. In investing in a business, we want to have a sensing if changes in Social Cultural will have any negative impact. Can the business survive as the social cultural change. As new and younger generation take over as main purchasers, will the business be able to serve this newer generation.
Fashion businesses may be subjective as changes in the preference will require fashion industry to keep up with the trend. But businesses in industries such as banking, education, healthcare are likely to be sustainable. Because these services are required and had been in the market for thousands of years.
Technology – How will the internet and technology affect the business? If you are investing into a brick and mortar bookshop business, you probably are going to have this business face various kinds of competition using a website. Look at what Amazon did to Barnes and Nobles…
But what can internet do to Mac Donalds and Pizza Hut? Well, you definitely cannot fill your stomach with “gigabites”, thus you still need the physical food. In fact internet makes ordering food easier especially for gigantic food businesses that have the infrastructure for quick delivery.
Is Facebook going to be sustainable? This is subjective in my opinion. The growth of internet and technology both supports and jeopardize the survival of social media group. But looking at things the way it is now, Facebook has capture customers and created a network effect so much so that the switching costs is high. I use facebook but I am really not confident because even as we scan facebook under the “Social Cultural”, i am not too sure if generations to come will be satisfied with what Facebook is providing. The feeling is that every generation to come wants faster, better, more different. So if everyone is in facebook, it may be more “cool” to be in another group. I do not know, and thus will probably not invest in such social media until I have more certainty.
So in determining whether a business is going to be sustainable, you can look at Social Cultural (Customers) & Technology. Ask yourself if customers will continue to purchase goods and services from the business and ask will rapidly improving technology aid or threaten the business.
Stay in tune for the next post where we discuss about the next 2 factors – Economic and Political.
In the meantime, you can join us at our workshop where we analysis some of these stocks together.
To your dreams,
Mind Kinesis Research Team