brk agm

 

As long as you own a single share in a publicly listed company, you are entitled to attend their AGM. In our previous article “Here Are 3 Reasons Why YOU Should Attend AGMs!” we explored why it’s worth your time to attend an AGM.

A Recap On Our Three Reasons!

 

  • You get to look the Directors and Management in the eye and ask them questions face-to-face

 

  • This would help your overall decision making process

 

  • You might get to have lunch there! But most importantly, you might have a chance to ask the Directors and Management questions in a smaller group where they might be explain to you the company’s operations and directions in more detail compared to the time-constrained Q&A session

 

Here Are Some Questions You Can Ask During AGMs To Help YOU To Better Understand The Company!

 
Let’s face it, at the end of the day, companies would not possibly be able to divulge every detail of the Company in their annual reports because they might be business secrets (Secret formulas for their food products), not everything is definite (You cannot ‘predict’ market prices to the dot), the annual report is already thick enough (We don’t want to read an encyclopedia, all we need to know are the crucial points) and many others!

 

Let’s explore TWO of such scenarios today!

 

Unknown_Poster

 

1) Not everything is known and knowable

Let’s consider companies in the offshore support services industry.

 

What we should NOT ask: “Where would oil prices be next month?”

With so many factors, especially nationalistic interests at stake, it would be almost impossible to arrive at a confident and definite response on this matter (Oil prices). Even if there was, would you be able to have the confidence to act on it?

Furthermore a period of one month might not even affect certain companies too severely given that lease contracts for some of their services may be in terms of years. However, we have to be aware that this could affect their leasing rates once their current contracts run out.

Anyway, if the company was so confident in their projections of oil prices, they would instead be in the oil trading business!

 

What we should ask: “What are management’s views on the prolonged impact of this matter and what steps is the company doing in order to respond to this change in operating environment?”

By asking the above question, you can arrive at a few key observations:

  • From their responses you can measure how different companies view the situation – For companies in industries dependent on an underlying commodity (Price determined by the market’s supply and demand), do they understand that certain factors are beyond one’s control and if so how are they doing on the controllable side (ie. Operating expenses and leverage) of the business – Acknowledging the issue and being able to convey their approach is a good start
  • Have they planned for it – detailed step-by-step approach to the issue is a very welcomed sign

 

2) Most of the time, our attention spans are too short

 

short attention span

 

With the availability of information, we are flooded by noise all the time all over the place. We have to be able to filter out the noise in order to add value to our decision making process. Always remember, more doesn’t mean better!

For this case we will consider a company that has started to expand overseas.

 

What we should NOT ask: “How will results be like for your overseas operations in the next quarter?”

For a company that has JUST expanded overseas, it’s hard to see the effects in a quarter. For what’s it is worth, it’s hard enough gauging what’s going to happen in the next year if it’s the first time the company is exploring this new market, not to mention in the next three months. If the company just started to build a factory, it might even take a year to ramp up to regular operations and maybe another to significantly contribute to operations. What we are trying to say is that in the short term, prices fluctuate; sometimes magically without any rhyme or reason. Basically, it’s not fair to judge a company based on such a short time frame unless the company has made a colossal operational mistake.

Many of us are influenced by this short nature and this can be shown in the weekly or even monthly updates by brokerages with changes in stock prices. This is one reason why sometimes there is a disconnect between the intrinsic value of the company compared to the market value of a company. Sometimes even when nothing is happening, these reports would create the noise to affect the opinions of people causing prices to fluctuate.

 

What we should ask: “What is the company’s plan for this new market (Number of stores that they are planning to open)? What is the cost to open a store? What is the breakeven period? Are the stores directly operated by the company or are they franchised? Who are their main competitors and what are they doing differently from them?”

From the company’s reply, we can gauge if:

  • They clearly thought out their expansions plans and from the number of stores mentioned you can compare it with the outcome in a year or two later to see if the company walks the talk by actually opening the mentioned number of stores and if not why?
  • If there was a shortfall, did they take responsibility for the shortfall; if they were too optimistic or did they shift the blame to ‘market conditions’? Everyone makes mistakes, even Warren Buffett but owning up and rectifying mistakes are the hallmark of a great company. However we have to make sure that these mistakes don’t keep happening!
  • From the cost and breakeven period we can roughly gauge how long would the company expect to breakeven and see if this reply tied in with what they say. What we are looking for is consistency!
  • Lastly, most businesses have competitors. As long as the company is able to give you a decent reply to tell you what makes them different from the other companies, that’s a good start.

 

Value In Action

At the end of the day, we never have complete information to make an investment decision. What we can do is ask the right questions and have the ability to filter out the noise from the good information in order to arrive at the best decision given the information we have!

 

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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded.The information provided is for general information purposes only and is not intended to be any investment or financial advice.

All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.

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