I was having a discussion with a group of my friends recently. They were talking about the stock market and what kind of stocks to buy. One of us in the group chipped in and said we should buy Facebook stock, even after its stock price has gone up to hit a new historical high with its latest earnings report.
When we asked why? She said it’s because she can see her husband is addicted to Facebook, Instagram and WhatsApp every single day. Immediately this sparked a whole discussion.
Now let me add a disclaimer that I myself invested and own some Facebook stock and I’m still holding on to them right now. I think that Facebook, Google, Amazon, Netflix, Alibaba and all these companies are great companies and very dominant in their respective industries. Their business benefit from huge economies of scale and almost never in our history have we seen such dominant companies with such scale. Does that mean we should go and buy all these stocks?
The answer to that depends on the answer you have in buying anything. How much is it? It’s all a matter of price.
Think about it. A Bentley is a good car right? If I sell it to you in Malaysia for RM100,000 when the retail price is RM1 million. That’s a good buy. If I sell it to you for RM10,000,000 then it’s not a good buy.
So it’s a matter of price!
Netflix, Amazon, Google and a lot of these major tech companies in the US have hit their all time highs in the past year. Today if you had invested in Netflix or Tesla at their high, you would have lost some 30% of your money today. If you had invested in Amazon at its high 1you would have lost 15%. If you had invested in Alibaba at its high, you would have lost almost 50%.
Yet these are all very successful companies that are dominant in their industry with no close competitor in sight.
Now once we establish that it is about price. The next thing is to know is that the fundamentals of a business don’t necessarily carry a share price.
It’s investor sentiment that is shaped by the media.
Right now the media is saying lots of positive things about Facebook as a company and so everyone’s very positive about it. Slightly more than a year ago the media was saying lots of negative stuff about Netflix. About how content costs was going to destroy its bottom-line and make its business not scale-able so it’s stock was on a decline. Then suddenly the media changed it’s mind. They started painting Netflix very positively and it’s stock price shot up. Why the media changed their mind? Well maybe it’s because they saw something they like? Or maybe there’s just some greater force that’s pulling at the strings behind the scenes.
As the everyday person, we can’t control these things and the sooner we understand it the better we’ll be.
Let me share my own personal experience with you.
In 2014 I made some good money in the stock market. I felt really good about myself, that perhaps I was a master investor. 2014 happened to be a year that almost everybody made money in the stock market. So it wasn’t really because of my skill but because of me just being carried by the wave.
Then 2015 saw a terrible stock market decline and I lost everything I made in 2014 and possibly more.
The thing is I thought I was smart about these things. Back in December 2014, I read an article about shale oil and deduced that oil price was going to go down all the way. So I decided to bet that oil will go down without actually shorting oil itself. How do I do that?
I sold all my oil & gas related stocks. This turned out to be a good decision.
The second decision I made wasn’t a good one. I thought about which companies would benefit the most from a decline in oil prices and I figured airlines. Fuel costs were their biggest costs. So I looked at a few airlines and invested in Air Asia. Today I’ve lost about 50% of my money on Air Asia, and at one point was losing up to 70%. Air Asia was suffering from some short seller attack but beyond that a lot of other airlines were down.
Then there were stocks like banks that I thought were safe investments for dividend stocks. Those came down a lot too. HSBC dropped 20% in the past 6 months.
But what if you’re really sure that the company will do well each time it announces results?
What I’ve learned is that smashing expectations don’t always result in a surge in share price. I bought Apple stock about a year ago expecting that it would beat expectations in its earnings announcements. I was right. It smashed expectations but puzzling enough the share price went down instead.
It continued to smash expectations the next one or two quarters and the share price still continued to decline. Today it’s 30% down from its high.
The thing about the stock market is that it’s very hard to make money. People have professional jobs focused on trying to make money off the stock market and even then some of them don’t succeed. What more about people like us… who work in other industries but use the stock market as a passive investment vehicle.
I’ve learned that the best way for me to make money is to focus on my own business. Bet on myself because that’s how I made whatever I have today in the first place. By non-diversifying and betting on myself.
Don’t get me wrong. I’m telling you all about the stocks I lost money in but there were some that I made money in too but that’s not the point of this article. The point is just really to share my own personal experience with you guys so you don’t make the same mistake. This is not professional advice and I am in no way a professional investor.
One thing I’ve learned is that money is hard to earn. Whether it’s from the stock market or not.
Timothy Tiah – Co-Founder of Colony, Kuala Lumpur Co-Working Space