Chapter 1: What is stock investment?
Preview
Hi everyone, before we get started, here's a quick introduction of what you will expect and gain from my blog.This is a blog about stock investments, and it will assist you in stock investment by using only this philosophy, "Value Investing", created by Benjamin Graham, one of the greatest investors,widely known as "Father of Value Investing", and he was Warren E. Buffett's mentor.
At the end of the day, this chapter aims to change your mindset on how you look at stocks, to give you a good start on a journey of wealth creation.
What is stock? What is investment?
Before we get started, just a simple question. Why do you want to know more about stock investments?
TO MAKE MONEY (Have an answer in your mind before highlighting the space, please don't cheat).
Well, that's my guess. If you are here for that reason, then you're very normal. No one should be shy to admit that. Right? So now, let us begin.
Stock basically means a public listed company, and this company is offering part of their company shares to the public. The public, which is us, can buy or sell these company's shares through the Share Market. So how do you make or lose money, or neither?
It's very simple, let's say Company A, 1 share is worth RM 1, you bought 100 shares, so you will use RM 100 buying into Company A. Now there are 3 scenarios:
Scenario 1
Each share of Company A is now worth RM 2, so for 100 shares now is worth RM 200. So, initially you bought 100 shares which is worth RM 100, now if you were to sell the shares now, you would have make +RM 100 profit.
Scenario 2
Each share of Company A is now worth RM 0.5, so for 100 shares now is worth RM 50. So, initially you bought 100 shares which is worth RM 100, now if you were to sell the shares now, you would have make -RM 50 loss.
Scenario 3
Each share of Company A is still worth RM 1, so you neither gain nor loss if you sell.
I'm assuming up till this point, everything is easy, right? Alright then, let's play a game, shall we? Everybody grab a piece of paper and draw a graph of price (y-axis) against time (x-axis).
The rules are simple, you have RM100, I will announce the price of a stock subsequently, and you can decide to BUY, or to SELL, or DO NOTHING. Alright? So the minimum quantity to buy is 1 share. And each round you get to perform 1 action only, which is either BUY/ SELL/ DO NOTHING. Please do not cheat, look at the prices after you have decided on the price that you are at now.
So this is Stock A, it's a.... tech company, the way I see it, at this price is worth a shot, promising bright future, listed for 10 years, very popular stock, and it's only selling RM1 per share only, it's a bargain!
Ready? Let's see who makes the most money.
First price, RM 1. Please make your decision.
Second price, RM 2. Please make your decision. (Please highlight)
Third price, RM 3. Please make your decision.
Fourth price, RM 2.5. Please make your decision.
Fifth price, RM 1.5. Please make your decision.
Sixth price, RM0.5. Please make your decision.
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That's the end guys. You can calculate your profit/loss. Okay, all done? If you've made profit, well done. If you've made a loss, too bad. So, here's my question:
What was the stock's name?
I think everyone started scrolling up, I didn't mention the stock's name. What was the reason you all started buying/selling on Stock A? So, I'm guessing the reasons are:
Because I said let's compete to see who makes the most money
Because I said Stock A is good, this and that.
Because the price is "cheap" now.
Maybe there are more reasons, it doesn't matter. The point from this exercise, is to convey this message to you:
The rules are simple, you have RM100, I will announce the price of a stock subsequently, and you can decide to BUY, or to SELL, or DO NOTHING. Alright? So the minimum quantity to buy is 1 share. And each round you get to perform 1 action only, which is either BUY/ SELL/ DO NOTHING. Please do not cheat, look at the prices after you have decided on the price that you are at now.
So this is Stock A, it's a.... tech company, the way I see it, at this price is worth a shot, promising bright future, listed for 10 years, very popular stock, and it's only selling RM1 per share only, it's a bargain!
Ready? Let's see who makes the most money.
First price, RM 1. Please make your decision.
Second price, RM 2. Please make your decision. (Please highlight)
Third price, RM 3. Please make your decision.
Fourth price, RM 2.5. Please make your decision.
Fifth price, RM 1.5. Please make your decision.
Sixth price, RM0.5. Please make your decision.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
That's the end guys. You can calculate your profit/loss. Okay, all done? If you've made profit, well done. If you've made a loss, too bad. So, here's my question:
What was the stock's name?
I think everyone started scrolling up, I didn't mention the stock's name. What was the reason you all started buying/selling on Stock A? So, I'm guessing the reasons are:
Because I said let's compete to see who makes the most money
Because I said Stock A is good, this and that.
Because the price is "cheap" now.
Maybe there are more reasons, it doesn't matter. The point from this exercise, is to convey this message to you:
NEVER BUY A STOCK THAT YOU DON'T KNOW
Now imagine it this way, the stock market is a supermarket. Inside the supermarket there are tons of goods such as fruits, vegetables, drinks. Imagine them as the stock. When you want to buy the goods, let's say...... apple, I would say most of the people will pick it up, check the apple 360°, any damage, the freshness, then you look at the price whether it's too expensive or worth it. This is what you normally do right? Although I know some people don't care, which is Consumer number 2, they just take it and put it inside their plastic bags.
If you're Consumer number 1, who did check your apples before buying it, well, good job, you are a smart consumer. But when it comes to stocks, do you agree with me that you did behave like Consumer number 2? No offense, but frankly speaking, majority of the people in the stock market behaves like Consumer number 2, known as speculators, which will be covered next time.
So, the point of giving the example above is to show you that "Value Investing" in stocks, is similar to the actions of Consumer number 1.
Benjamin Graham defined value investing as such:
"An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative"
[I quote from the book: The Intelligent Investor]
It generally means you have to do your own homework and research to valuate the company, so that you know how safe your money is being spent, and approximately how well the return of investment it brings to you. If you did not perform the above two, all actions are considered as speculative. So what do you mean by adequate return? I always like to take Warren Buffet as the benchmark here, Warren Buffet's yearly portfolio's performance is approximately 20% annually, it means that the money he invested in 1 year's time, it will make a return of 20%.
E.g. In 2007, he invested RM 100,000, by the end of the year 2017, he will have RM 120,000 by then. His profit will be RM 20,000.
There was a scam in Malaysia, JJ***, if I'm not mistaken promised a 20% return per MONTH. So my question to you, after knowing that the world's greatest investor's performance, does that sound absurd to you now?
Now, I'm not saying that anything that is above 20% return annually is a scam, it all comes down to how well have you done your research to make sure your capital is protected and well deployed for investments. In stocks, it is still possible to make 100% in a year, and to know how certain people does it, I'll cover it next time.
I hope some of you have a change in perception on stock investment. I'll continue this another time.
Thank you.
Benjamin Graham defined value investing as such:
"An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative"
[I quote from the book: The Intelligent Investor]
It generally means you have to do your own homework and research to valuate the company, so that you know how safe your money is being spent, and approximately how well the return of investment it brings to you. If you did not perform the above two, all actions are considered as speculative. So what do you mean by adequate return? I always like to take Warren Buffet as the benchmark here, Warren Buffet's yearly portfolio's performance is approximately 20% annually, it means that the money he invested in 1 year's time, it will make a return of 20%.
E.g. In 2007, he invested RM 100,000, by the end of the year 2017, he will have RM 120,000 by then. His profit will be RM 20,000.
There was a scam in Malaysia, JJ***, if I'm not mistaken promised a 20% return per MONTH. So my question to you, after knowing that the world's greatest investor's performance, does that sound absurd to you now?
Now, I'm not saying that anything that is above 20% return annually is a scam, it all comes down to how well have you done your research to make sure your capital is protected and well deployed for investments. In stocks, it is still possible to make 100% in a year, and to know how certain people does it, I'll cover it next time.
I hope some of you have a change in perception on stock investment. I'll continue this another time.
Thank you.
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