Investment: Art Or Science?

I believe that investment is a combination of art and science, more of an art.

It's definitely not a straight forward science.

I know that I'm not a knowledgeable investor.

I'm also not a good learner.

Though I use fundamental analysis in stock market investment, my fundamental knowledge is actually very shallow until today.

What I know is something very simple which everyone else knows, PE ratio, ROE, Debt/Equity ratio, dividend yield, EPS growth etc.

So, I'm not a "special one", I'm just a " normal one" :)

I know the importance of some other more accurate financial ratios such as ROIC, Enterprise value, certain cash flow ratios etc but I rarely use them.

I read from books and numerous articles about the importance of intrinsic value and margin of safety in investment but I didn't really apply them.

I did try to learn to calculate fair value of stocks using dividend discount model and discounted cash flow model. 

However, when I realize how the fair values are derived, I straight away gave up. This is because the calculation is based on lots of assumption.

Please don't get me wrong. I don't mean that intrinsic value calculation with DDM and DCF model do not work.

Actually they have been proven to be useful and important in value investing throughout the world.

Some may think that I am too "cocky" to ignore all those proven investment methods and do it all my way. It's OK. I'm not that great as most of you think.

Everyone has their own investment style and I'm applying what suits me the most at this point of time.

So far I really find it difficult to put DCF into my brain.

My investment style changes with time. There have been quite a lot of changes throughout these years.

I notice that there is some small but significant changes this year. Has anyone notice that I seldom talk about things like ROE, EPS growth, DY recently?

For me, stock market investment is a game of prediction. I predict the growth, the strength and the sustainability of a business. 

As most of the time I plan for longer term investment, a sustainable business in mid to long term is important.

Growth - can the sales and profit improve?

Strength - is the company competitive? can it survive a downfall?

Sustainability - can the business and the company last long?

As fundamental investors, we all try to make an intelligent guess on a company's future, or the share price movement for those speculators.

While I'm not calculating intrinsic value with DCF/DDM method, I'm actually still looking into the company's cash flow, as well as balance sheet when choosing a company for investment.

If the company has lousy balance sheet with high debts and low quality assets, how can it survive a downfall or last long?

If the company has poor cash flow especially poor free cash flow, how good a balance sheet can it has and how long can it last?

If the company has poor ROE, has high debts but it gives signs of growth and its cash flow is improving (like Hevea some time ago), it is still a good candidate for investment.

So it's not necessary to get the ROE box ticked before putting my money in a company.

It is not easy to find a perfect company that tick all the boxes.

If there is, its share price should be imperfect.

The "margin of safety" I'm using is PE ratio. If I want to be safer, I will use lower PE ratio as an entry point.

Anyway, PE ratio is not flawless of course. Just look at most property stocks' PE ratio at the moment.

I don't have a formula to pick a stock for investment. It is all based on the "right feel".

That's why investment is more of an art for me.

People are like this, we are scientific people and we want to have everything in order and make everything more simple.

So we come up with various magic formulas in investment.

This makes investment more like a science rather than an art, if you follow the formulas rigidly.

Again, I'm not saying that these formulas are useless. Certainly they have helped many investors to make good and correct decisions in investment.

I cannot rule out that I will use these formulas or calculate intrinsic value in the future.

Everyone has their own opinions and investment styles.

There is no need to condemn others if their views are different from ours.