One of the most common questions we get is whether a particular asset is “good” or “bad”. Usually, the investor has been looking at an asset and wants to know if now is the time to buy or sell. We tend to view assets that are going up as “good” and those that are going down as “bad”. That is, unless we are buying things from a store. In that case, a deep discount sale is definitely to be regarded as “good”…but we digress.

It is hard to know how to answer the good/bad question because assets are neither good nor bad. They are merely the building blocks for an investment strategy. Also, one can rarely assess an asset in isolation. And finally, the price one pays for a particular asset goes a long way towards determining whether it represents good value to the buyer.

So the black and white question has quickly morphed into three separate considerations, two of them strategic and the final one tactical.

  1. Does the asset make sense as a candidate for a particular investor’s investment strategy?
  2. If yes, are there other assets that could do the job just as well or better?
  3. At current prices, is the investor over or underpaying for the asset?

Since we are already talking about good apples or bad ones, let’s look at the company which has filled my house with iProducts. Is Apple a good company? Most reasonable people would answer yes. This is a company which has changed and in several cases invented several categories of consumer electronics and made buckets of money in the process.

But let’s look at it through our three questions.

  1. Should you consider Apple Inc’s common equity as a potential investment for your long term investment strategy? What is your risk profile? What is your investment time horizon? Is this a company that has staying power like Microsoft, Intel and Google? Or is it a Dell, HP or perhaps a Yahoo? Will it continue to lead or could it lose its way. Will it reward you as a shareholder? And if so, how?
  2. Are there other companies (singular or in combination) that give you exposure to the same market segment or investment opportunity as Apple? Are they better? Worse? Up and coming? Or fading? Do you need to pick one company or is there a fund or ETF that gives you exposure to the thematic risk without exposing you to too much individual company risk?
  3. Is Apple a good value at these prices? Well, what are you looking for? Are you looking for bold M&A strategies, new must have products and explosive growth? Or are you looking at low relative P/E ratios and strong cashflows to support a healthy and growing dividend. Are there better opportunities?

As you can see, even for one simple equity the question of whether it is good or bad is not as simple as this modified 1 year chart.
Apple Inc 1 year chart
Source: Bloomberg

What should an investor do?

Approach investing from a broad perspective. If you start from too narrow a perspective, you run the risk of asking the wrong questions. The risk is that the person who answers that question may not take the time to work through all the strategic and tactical considerations before giving you the proverbial thumbs up or thumbs down. If you ask the wrong question, your chance of getting the wrong answer increases. And more importantly, you may not even understand why the answer is wrong.

Tagged with:

Filed under: Investment IdeasMarket PsychologyMarket Theory

Like this post? Subscribe to my RSS feed and get loads more!

Possibly related posts