Investment Survival Guide

The Key rule in investing – identifying sound companies Should I re-invest my dividend?

We will apply these steps when buying investments Consulting your stockbrokers before investing is recommended however there is a lot of homework you can do to identify sound companies. If you were to buy a TV, you will try to buy the best TV within your budget. No rocket science. We apply this common sense in our everyday life. Even high profile investors such as Warren Buffet1 approach investing by following this reasoning. He calls it ‘value-investing’. Therefore in the same way you buy your TV (or house or your car) you: FIRST: identify sound businesses SECOND: make sure that you’re not paying too much

How would you buy your TV?

How would you buy your TV? 1. Shop around and get a feeling of current models 2. Learn about the new specs TV offer (e.g. LED vs. LCD) 3. Research the internet 4. Compare 5. Buy Looking at past share prices is practically useless. You wouldn’t look at past TV prices, right? Past share prices provide weak information on value. Warren Buffet is one of the world’s wealthiest people and regarded as one of the most successful investors in the world.

Let's apply shopping to investments

step 1 SHOP AROUND AND GET A FEELING OF CURRENT TV MODELS step 2 LEARN ABOUT NEW SPECS TVS OFFER (e.g. LED vs. LCD) Consider different industries and determine in which industry you want exposure to.

Companies have many ‘specs’. Most important are (1) risks and (2) profitability indicators. 1. Risks step 2 LEARN ABOUT NEW SPECS TVS OFFER (e.g. LED vs. LCD) 2. Profitability Return on Capital Employed (ROCE) We want to buy good businesses. The Return on Capital Employed ratio is one of the best benchmarks to identify companies that have strong business models. Why return on capital? E.g. Company X and Y are both in the business of selling goods. Neither company has any borrowings. Company X earns €8,000 on every store and each store costs €100,000 to build (8% return on capital) Company Y earns €10,000 on every store and each store costs €400,000 to build (2.5% return on capital) Which business sounds better? Of course, you would rather own a business that earns a high return on capital. Indeed, you should not be interested in Company Y as it earns less than what the Malta Government Stock pays! High profitability ratios result from good investment decisions and this should be a good reason to be interested in a company. The ROCE ratio also helps you decide if you want to participate in: a. a scrip issue2 b. a rights issue3 since re-investing profits in a highly profitable company makes perfect sense! The earnings yield4 tells you if it’s a bargain or not. For example a TV set, may be twice as better but would you still buy it if it costs three times as much? 2 shareholders choose whether to receive a cash dividend or shares 3 an invitation to existing shareholders to purchase additional new shares in the company at a discount to market price 4 earnings per share divided by share price - this ratio shows the return received for every euro invested at the current market prices step 3 RESEARCH THE INTERNET step 4 COMPARE step 5 BUY Some topics to research: 1. Growth prospects (you want to be in industries/ companies that will grow more than average) 2. Fundamental drivers of the company, e.g. does the company sell high quality products (think of Apple)? Are customers loyal (think of Coca-Cola)? 3. Is the company soundly managed? e.g. did the company embark on major projects that turned bad? 4. Risks inherent in the industry (e.g. Air industry after a terrorist threat) Many investments are good but you want to buy the better ones – so compare the “specs” of different companies before committing. Comparisons in investment picking is more important than comparing TV sets. Investments are all relative since it is about receiving the highest return for every euro you invest! Acquisition of the investment you identified must be made through a licensed stockbroker. A full list of Maltese stockbrokers is available at www.borzamalta.com.mt by clicking on the “Member Firms” tab.

How to do your homework

option 1 Download all financial statements and manually compile a spreadsheet with the data Compare financial statements and compute ratios Easily prone to errors given the amount of data that would need to be keyed in Certain assumptions made and conclusions reached cannot be challenged by third parties which might highlight some issues that would have been overlooked Time consuming option 2 Engage an investment manager Costly Will typically work for high net worth individuals Must be contacted on a timely basis since your investment strategy needs to reflect changes in market conditions option 3 Log on www.blackdigits.com.mt Free of charge Discuss your conclusions and opinions Easy to use analysis tools that helps you to identify trends in profitability and risk exposures of a company Easily compare financial statements of different companies with different capital bases and across different industries.

about the blackdigits platform Dedicated to the Maltese market Up-to-date financial statements published by listed companies Performs calculations that one would otherwise manually compute when comparing different sets of financial statements Users may share their comments or opinions on specific items published in financial statements Community-based website intended to facilitate the sharing of financial knowledge and data Co-funded by the ERDF programme our journey does not stop here The functionality to upload published financial statements of unlisted companies and compare their performance with that of listed companies Edit information uploaded by other users Users will be able to share more information Constantly improve the platform so that more information can be plotted, ranked and analysed. This is not a comprehensive investment guide but contains some valuable guidelines on how financial statements of a company identify some of the company’s strengths and weaknesses. This report has been issued by XG Ventures and has been forwarded to you solely for your information. It should not be considered as an offer or solicitation of an offer to sell, buy or subscribe to any securities or any other rights pertaining thereto. All rights reserved. XG Ventures is registered in Malta with partnership number P1250 and registered office at 34, Missionaries Street, Naxxar, Malta.