The Best Questions To Ask When Investing: Part 3
Over the past 10 years, I have probably read about a hundred books or so on investing. However, I have found it hard to retain much of the content in most of the books.
That’s because after I had gone through 10 books on investing, I realised that most investing books seem to be repeating the same concepts and ideas.
However, there is one book that is embedded in my mind like how a sticky chewing gum gets stuck to the sole of a shoe. This book is one of the first I ever read and the best investment I’ve made so far. It is Common Stocks and Uncommon Profits by Philip A. Fisher.
One of the most valuable insights I got from the book are the 15 questions that Fisher himself asked when analyzing a company. Till this day, I continue to ask the same questions about every investment I’m making. So far, the 15 questions have been very profitable for me. That is why I want to share the questions, along with my thoughts on them, in a series.
Question 7: Does the company have outstanding labour and personnel relations?
The culture of a company is often overlooked by investors. That’s partly because culture is not something that an investor can easily observe from an annual report. Another reason is because there is no numerical value that’s easily attached to a company’s culture in its financial statements.
However, the culture of a company is one of the most important factors on whether it can succeed in the long run. If you compare a company with passionate staff who work hard for the company and who share the same vision and values, to a company with employees who are working merely for their monthly paycheck, which company do you think would have a better chance of succeeding?
Research has also shown that having a strong culture could boost a company’s revenue by over four times.
Thus, investors would need to learn how to observe the quality of a company’s culture. This may involve checking with employees of the company, or speaking with its customers and competitors.
Although a company’s culture is not easily seen from its financial statements, there are still clues within a company’s finances that can provide us with glimpses of its culture.
For example, a company with a strong culture may have a higher profit margin compared to competitors as its employees are willing to work beyond their job requirements. The company could also have lower staff turnover, which means it will be spending less on human resources. In addition, the company could also have a higher return on equity as it may be using its resources more efficiently.
Fisher’s 15 questions are essentially a checklist for us to think about when analysing a company. The first six questions focus on a company’s future potential and how well a company can generate profits for its shareholders.
The question featured above reminds us of the important idea that a company will only thrive if great people are working in it. Great people can generally find a job anywhere they are. So, such employees would only stay and work for a company willingly if there is something worthwhile to work towards.
Thus, having a strong culture has multiple chain effects on a company’s financial performance. As an investor, we would need to be able to identify the presence or absence of a strong company culture.
Stay tuned as I explore the rest of Fisher’s questions soon!