How to pick stock (part 16)

Rules that I set

Summary of the rules that I set here is:

1. Never buy a company that you never know.

No matter how good you listen from your friends or other people. From the lesson that I learned from the past, the more you understand the company you invest, the more you are confident to hold a large portion on it.

The first and second stock that I invested was based on the other's recommendation, the result was bad. I do not know what really the

There is a way to understand your business. We can follow the porter five rules. Actually if we think about the Ecosystem, there is a value chain from top until the bottom. The more value added to the customer, the more profit margin we can capture from the business.

Take for example, for the retail product such as macdonald, coca cola, those are the number one of the industry, they enjoy the bargain power to their customer and supplier. In this industry where they actually stand a chance to work for it. Some example like medical machine, high end machine etc. They have some sustainable competitve advantage to stay alive with the current Eco system.

I did invest in one company - psci, where it is the only company who has the monopoly on the ship building. Its balance sheet has a very high intangible asset, which derived from the contract given by the government. However, with the lousy management and lack of the latest technology, this company delayed the ship deliverment.

Based on my experience, the company with more than 10% and above net profit margin, they have some bargain power over their client or supplier. If one company which profit margin is higher than its peers, meaning its strategy of being differentation works.

I can give you a lot of example of high profit margin company, they might have some strengh on its currey business, but if you really talk about the future, you might also think of the reseach and development of the products as well as how efficient of the company which can streamline the current business process.

Sometime, when we talk about the business, we should always make ourself be very clear or stable before we start venturing to another new market which provides potential higher return compared with the current business.

The staffs must follow the rules set by the company. Without smart person intervention, we can act accordingly to the rules.

To be continued...