Part II.I (Buying a share) - Putting THB 100,000 in your friend's business
When people look at well-established stocks like PTT, SCC, AOT, GULF, or other blue-chip options, they might perceive them as intricate entities with complex operations that are challenging to comprehend. Consequently, it becomes easier for them to disregard the fundamentals and instead view stocks as another merchandizer.
Though understanding some businesses might be challenging, it's not always the case. Starting with a smaller company with a simpler business model can be more encouraging. In fact, investing in a stock is actually just like investing in your friend's coffee shop, clothing store, bakery, restaurant, or any other simple businesses. Imagine if you were to invest THB 100,000 in your friend's business—what would you need to know? What questions would you ask?
One of my friends, she owns a coffee shop, a business often considered among the top choices in people's minds this decade. At first, I heard that her shop is very small, located on the ground floor of an office building in the outskirts of Bangkok. Given these conditions and considering numerous coffee shops flooding the town at the moment, It didn't draw any of my attention.
One day I had a chance to visit her shop. To my surprise, the shop was even smaller than I had imagined. It could barely be called a shop as it consisted of a counter bar encircling the main pillar of the building, with no decoration and without even a name. I bought a cup of cappuccino and some bakery. The taste was ok, but the price was good. She charged THB 60-80/cup for a fresh brewed coffee (that she roasts by herself).
As I sat there for a while on one of the four stools available there, I started to notice the steady stream of customers coming in the shop buying a cup of coffee or a couple. Especially, when it closed to 1PM when the office people come back from their lunch. In about an hour, I roughly counted, 30-40 cups sold along with some bakery and snacks. Later on, when the wave of the office people passed, I started asking her more about this business.
She told me that there are two prime periods each day: morning when people arrive at the office, and afternoon after they come back from their lunch break. During these periods, each is about an hour, she normally sells 60-80 cups. However, sales continue during office hours, though not as briskly as during prime times. Positioned on the ground floor, the shop caters to casual customers, building guests, messengers, and others who passes by.
On an average workday, she sells around 100-120 cups, in addition to bakery items and snacks.
In terms of costs, the expenses for coffee (coffee, paper cups, straws, ice, etc.) account for only about 25-30% of the selling price. For the bakery, there's no cost as she receives a commission of about 20-25% from the bakery store who bakes and places them there. She hires one staff with a salary costs THB 15,000 per month. And, the rental fee she pays to the building, THB 70,000 per month. All the raw materials required are replenished on a weekly basis.
Overall, her sales amount to around THB 180,000 - 200,000 monthly (in cash on a daily basis), and her net profit ranges from THB 30,000 - 40,000 per month This small little shop is purely a money-making machine.
With this insight, I was eager to propose investing in her business and even offered THB 100,000 immediately as an initial investment for this little coffee shop without a name. Regrettably but as I expected, her response was 'no.' The reasons given by her was very simple.
First, she has no financial constraints, therefore there was no need for additional cash. Second, the shop was operating at almost full capacity, and couldn't expand further due to the limited space (the size of the main pillar). And third, the business is just too great to be shared with any other.
Turning back to stocks, purchasing a stock is similar to investing in a friend's business. When investing, you should have the same set of questions as I had based on common sense.
What is their core business? What products or services do they offer? What are their daily, monthly, or yearly sales figures? Who are their customers, and where are they located? What are their costs, and consequently, what is their profit margin? Is it constant or fluctuate? How is the cash flow? And how is their current financial position, including debt level? These kinds of questions…
Once all these questions above are justified, the final question you may ask would be how much the price you should pay for an ownership?
While, in my friend's case, the conversation couldn't reach this far as she had no intention to sell hers, when it comes to stocks listed on the market, you can always buy some shares at some particular prices. If the price being offered on the board is cheap or expensive, we shall discuss later in the next part.
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