Taking stock after investing
Factors to look out for to keep investments on the right track
After investing in stocks on the Singapore Exchange, you need to know how to spot the red flags and warning signs.
Reality might bite as we hope our investments will provide a steady and reliable stream of income.
"You may be making significant profit one day but losing it just as quickly on another," says Mr Vasu Menon, vice-president and senior investment strategist at OCBC Bank.
Nothing can fully shield investors from losses, but there are indicative symptoms to hint at the health of investments.
INDUSTRY HEALTH
Mr Menon says investors have to understand the industry in which their invested company is operating in.
"For example, if I've got a stock that's good based on the company's fundamentals, but the industry is going through a tough time, chances are, it is going to affect how well my stock does," he says.
One such incident occurred last year when the oil and gas industry went through a major slump.
Oil prices dropped tremendously, eventually affecting the share prices of Sembcorp Marine and Keppel Corp, both of which are within the oil and gas industry.
"The writing was on the wall - the oil and gas industry was going through a difficult patch," Mr Menon says.
"In those instances, if you've made profits from an industry that's just entering a slump, you might want to take your money off the table and exit, especially if you have a lot at stake."
COMPETITION
The company's position - compared with its competitors in the industry - is another important factor.
Mr Zal Devitre, head of investments at Citibank Singapore, says: "If the company is near the bottom of its class, or losing relevance in popularity, the company may be headed for tough times."
The advancement in the technology industry is a recent example.
"For instance, mobile users have moved... towards smartphones.
"Handset companies who have not kept up have seen their earnings suffer and some have ceased to exist," he says.
MANAGEMENT
While external factors play an imperative role, the internal operations is just as big a determinant - including the exits and entrances of the top dogs, says Mr Menon.
"If a new CEO (chief executive officer) comes in, especially with small companies, it can completely change the management quality of an organisation.
"It is easier for him to steer the ship, especially if the company doesn't have long-standing operational practices in place.
"Therefore, it is important to keep tabs on what he is doing, his plans for the company, and whether those plans involve taking the company away from its core business."
Before new characters enter a company's story, however, it is crucial for investors to keep an eye out for surprise exits, says Mr David Kuo, CEO of online investment publication, The Motley Fool Singapore.
"There could be lots of legitimate reasons why top people leave their jobs, but investors should be aware if the person at the top takes flight without explanation."
PROFITS
Lastly, being able to understand the numbers game is also vital for investors to pre-empt danger.
Mr Menon says: "Profit margins give you an insight into the amount of competition they are facing.
"If a company's revenue is down, but its profit is up, then the company has achieved it by cutting cost. It's important to ensure that revenues too are holding up."
Similarly, the extent of debt based on the circumstances a company is operating in is also pivotal.
Mr Kuo says: "When it comes to investing, we don't want our (invested) companies to carry more debt than their rivals.
"Debt can be a double-edged sword. It can be great when times are good but, if an economy or a sector deteriorates, it can also cut a balance sheet to shreds."
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