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Where Next?
In the Gold Rush, ultimately the big winners were not the prospectors, but the people who sold the picks and shovels. When searching for individual company investment opportunities, following that strategy often leads investors to the real pot of gold. Filtronic's products are used in wireless communication infrastructure equipment, cellular handsets, electronic warfare systems, and wireline communication systems. That sounds a bit like picks and shovels to me. Or does it?
Learn
Investors should learn as much as possible about a company before parting with their hard-earned cash. It was Warren Buffett who said if you're not prepared to hold a company for 10 years, you shouldn't hold it for 10 minutes. If you really are going to follow the great investor's advice, you ought to know a hell of a lot about a company before buying it.
There is only one Warren Buffett. I try to broadly follow his investing principles, yet don't even get close to achieving his long-term returns of about 23% per annum. I'm not alone. But Buffett has a big advantage over us mere mortals -- if he called a company in which he was interested in investing, he would be put straight through to the Chief Executive, the Finance Director, the Chief Operating Officer, and even the mail boy if he so chose! Having Buffett on your shareholder register would be an absolute pleasure for any company.
Most of us can only ever dream of getting close enough to a company so as to have a direct line to its management. However, the Internet has somewhat levelled the playing field for private investors. We can now access all the latest news about a company, browse its financial numbers, and read what other people are saying about the company. Despite these welcome improvements, unless you can get right in under the skin of a company, as an investor you're not going to know what's really going on.
For example, an investor needs to know these things about a company:
* what's its overall strategy?
* what are its weaknesses?
* who are its competitors?
* what's its competitive advantage?
* has it got outstanding management at all levels?
* what do the employees, and ex-employees, think of the company?
* do people actually enjoy working for the company?
* how big is the overall market for the company's products?
* what do the company's competitors think about it?
* what is its marketing strategy?
That's a mighty big list, and by no means exhaustive. What are your chances of answering all of those questions? I'd say for 95% of private investors, it would be impossible to do so. Working in the industry helps, but you're never going to get close enough to the company to be able to answer all those questions, unless of course you work for it.
What's a private investor to do? Give up the game completely? Perhaps so. Perhaps the best thing to do is to stick largely to low-cost index tracking funds, knowing that you'll still be able to benefit from the overall long-term gains in the stock market. There's nothing wrong with this investing strategy -- boring and rich is better than exciting and poor.
Scuttlebutt
Having said all that, I still believe the individual investor has a fighting chance of beating the market, and therefore beating almost 90% of professional, paid fund managers. If you're really keen, you can perform some "Scuttlebutt" analysis. Scuttlebutt was a term coined by Philip Fisher in his classic investment book Common Stock and Uncommon Profits. Fisher essentially attempted to answer as many of the above questions as possible. Only then would he feel comfortable enough to make an investment decision.
As you can imagine, Scuttlebutt is a very intensive process. Having done all the hard work, and spent a considerable amount of valuable time trying to answer those questions, what if you find the company is not worthy of your cash? The whole process could become somewhat demoralising, not to mention time-consuming.
Money Doesn't Grow On Trees
If share picking was so easy, we'd all be making millions out of it. The whole population would be buying and selling shares, and we'd all be talking about it in the local pub each night. Sad as it may seem, this just doesn't happen. And nor should it. We all have to work for our money, and this includes our investing money.
Reality is that the private investor just hasn't got the time or the contacts to be able to perform a Scuttlebutt analysis on each of their potential investments. But that doesn't necessarily mean you shouldn't buy individual companies. You can still do your homework, which should entail at a minimum:
* reading the annual report
* reading the company's web-site
* reading (and posting on) the company's discussion board
* looking at the company's valuation
From that, you will gain a reasonably good knowledge of the company, its markets, its competitors and learn (legally!) from industry and company insiders. At that stage, based on the company's valuation, you can attempt to make an informed investment decision.
But What About Filtronic?
I started this article with the intention of establishing whether Filtronic was a worthwhile investment opportunity. The shares have fallen from a peak of 2325p earlier this year to around about 1190p today, having been close to 700p not too long ago, although that alone is not a reason to buy the shares.
Quite soon after I started reading about Filtronic, I established I was a little out of my depth. It would take me quite some time -- more than I had to write this -- to learn about the company. I don't propose to do a full Scuttlebutt analysis, far from it, but I do need to understand their business model and future growth prospects. Luckily through the Internet, help is at hand. Below are some excellent starting places. I'll be visiting them!
But before then, we'll conclude with a Fool's Eye View poll. After reading this article, what are your thoughts?
* I'll stick with index-tracking funds
* Even without Scuttlebutt, I have all the information I need to pick my own shares
* Too much analysis is counterproductive
* Gut feel and a little bit of luck go 80% of the way to successful investing
* Just tell me whether I should buy Filtronic!
Vote Here!
Filtronic web-site
Filtronic discussion board
The Yorkshire Post on Filtronic
or
Stick to index trackers
Common Stock and Uncommon Profits -- recommended reading, and available from Amazon.