This article originally published in The Northern Daily Leader on 24 May 2014.
Once of the joys of living away from the coast is that you get to enjoy the seasons. Instead of the monotonously perfect weather you might find at the coast, we get to be hot in summer and cold in winter, just like it should be. While summer can be fun, winter is my favourite time of year – not only is there no need to dust off the lawnmower, but you get to settle down each evening in front of a warm and cosy wood fire, if you’re lucky enough to have a wood heater. Some people may prefer the convenience and instant warmth of central heating or a reverse cycle unit, but for me a wood heater wins hands-down. I even enjoy the rigmarole which accompanies having a fire – splitting and stacking the wood, fiddling with paper and matches, trying to coax a cold fire back to life and hunting for kindling in the garden.
Over the weekend, during a search for suitable kindling, it occurred to me that perhaps looking for kindling was more dangerous than you might think. It probably depends on where you live of course, but our house is on a bushy block, with plenty of trees and scrub. I imagined myself reaching out to grab a piece of kindling in the evening gloom, only to find I had latched on to a wriggly snake (I guess it would have to be a snake with poor hearing, as it would be impossible not to hear me stomping through the scrub). Sticks and snakes look quite similar in the near darkness, so it’s not an impossible outcome. Always on the lookout for ideas for this column, I immediately thought that this is a good analogy for the investment process. When you invest in a company on the stock market, you can’t be completely sure of whether you’ve just picked up a stick or a snake. The problem is that both good and bad investments, as with sticks and snakes, can appear remarkably similar, at least on the surface. They both probably have a professional website, publish glossy financial reports and have suitably-qualified management and directors. Some go on to reward investors, others however join the ever-growing list of duds (ABC Learning, Babcock and Brown and HIH, just to name a few).
So how do you tell the difference between a stick and snake in the world of investing? At Baiocchi Griffin Private Wealth we focus on a number of key issues: governance and management; balance sheet strength; industry sustainability and consistency of profits and dividends. To truly distinguish the good from the bad means taking more than a cursory glance; just the same when it comes to spotting the difference between a brown stick and a brown snake.