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Monday, July 4, 2016


It turns out that there are more people than I thought who know about this and go to my high school. I thought I would write a post somewhat directed towards them to remedy some of the most important glaring misconceptions that I hear about all the time. However, I won’t necessarily be going over all of them; it won’t be a rant. Sorry in advance if this seems like a fluff post, because it is. If you’re looking for info regarding my portfolio, just keep scrolling through.

Just because a company is objectively good doesn’t necessarily mean it’s a good investment. The market is pretty smart; expected things are taken into consideration.

My most controversial of the statements. I like to refer to an incredibly profound quote that I found a long time ago, so long ago to the point where I don't even remember where I found it. I still printed out and it’s been with me since.

“When you place a bet in the market, you’re never just betting on the future of the company you’ve bought or shorted, although this is how it is often cast. Rather, you’re betting on the misalignment of the average investor’s perception of that company’s future with its actual future; that is, you stand to profit only to the extent that the current valuation of the company is “wrong”. As such, you’re really placing a double bet, in the sense that you’re betting on two very separate things, each of which is extremely difficult to predict at all, much less quantify. The first has to do with the future of the company: How will its revenue flow change over the next few quarters, or over the next five to ten years? How big can this company really get, and why? But the second, very separate aspect has to do with other investors: to what extent do people over and underestimate the potential of this company, and why?”

Companies can be priced for perfection, or even beyond it. One of the main examples which comes to mind is Tesla, which is trading at a negative PE (currently losing money) and a >60 forward PE. Although just about everyone can see that Tesla obviously probably has a very bright future ahead of them in continuing to expand their electric car sales and customer base, other people know that too. It will already be factored into the valuation.

Another glaring insight that is simply wrong is when insights are believed to be genuine and individual, that the rest of the market doesn’t know about it yet, even though it really is just an obvious connection to make that doesn’t require a particularly high level of intelligence to see.

Aside from the fact that one should already realize that when others’ money is on the line, they will be far more keen to research and know about a subject, one must realize that the markets are very up-to-date, even more so than what many may think. Others definitely already know that releasing a new iPhone will increase aggregate revenue and profits, or that Halloween will increase sales for confectioners. These aren’t breakthrough insights by any means, and it would be a fundamental error to try and trade on them. Like the quote says, it is the deviation from the past expectation that causes changes in pricing, not the expectation itself.

Price alone does not deem a stock expensive.

The price of a stock is simply the market cap of a company, or its net worth, divided by its shares outstanding, or amount of shares in circulation, which is a completely arbitrary value. Hypothetically, a company with a net worth of $1 million could be split up into two shares of $500,000 each, or into 1 million shares of $1 each. It’s not like each share in the former example is “more expensive”, as you are getting far more value per share in that example.

It’s like choosing to split a pizza up into 4 slices worth $2 each or 8 slices worth $1 each. You would still be getting the same net value amount of pizza if you spent your $2 on one slice sized at the 1/4th of the pizza for $2 or two slices sized at the 1/8th of the pizza for $1 each.

People determine if stocks are expensive based on other underlying factors, such as Earnings per Share (EPS, = Net Income/Shares Outstanding), EBITDA (earnings before interest, taxes, depreciation, and amortization), Sales revenue, Book Value, and Growth Rates. These figures are displayed through ratios, like the P/E ratio (Price to Earnings ratio, = Price per share/Earnings per share - basically asking, how much are each of this company’s shares generating in earnings?)

Basically, the most important thing to do is not see a lofty price per share and instantly think that the stock is expensive. It’s how the price per share is related to other underlying factors of the business which determines that.

Jordan Belfort was not a trader, a portfolio manager, a banker, or even a legitimate broker. Contrary to what that film’s title implies, his connection to “Wall Street” is marginal at most.

It doesn’t happen as much as before, but there used to be a palpable sort of idolization of this guy at least among the people I know, Jordan Belfort. I remember people saying that he was totally “raw”, someone who had mastered Wall Street, whose only mistake was getting swallowed up with the ideal lifestyle that is commonly associated with it.

He’s nothing but a con artist. His business was not affected if his clients lost money. And in fact, because he was pitching penny stocks, which are simply known to be crappy investments in general, the claim that he wanted his clients to lose money is justified.

And I mean, on a personal note, how can you really see this guy as some sort of role model? Dipping excessively into drugs, scamming others, abusing and eventually divorcing your wife, and causing havoc in your family isn’t a small deal. I mean, I get that he threw immaculate parties and became rich, and that’s something just about every high school boy thinks is cool and desirable, but there still is so much more to being an adult than living out the wild and rebellious teenager’s dream. Having a wife, family, and clients should be important. One should take care of the people who have entrusted him or her with the important things they have themselves. This guy hopelessly failed in the fiduciary and intimate aspects of his life.

It’s not that easy; nothing ever is.

Like I said before in the first section, the markets and the people involved in them are generally pretty smart. I wouldn’t say that they are always outright perfect, but they are smarter than many might think at first.

There is no magic money-making day-trading strategy where ordinary people can just “make $12,563 a week day-trading at home”, or a magic system which guarantees profits.

For the overwhelming most part, there is no magic, money-making stock that everyone else has ignored and that only you know about, or a certain event/concept/idea that only you have predicted. It is becoming rapidly increasingly difficult to gain an upper hand in the markets. I can cite examples of firms spending an exorbitant amount of time and or money in hopes to, but that list would be very long.

It’s not that hard; nothing ever is.

I want to leave you with a more optimistic note. With the advent of information technology and the internet, there is an ever increasing abundance of information regarding finance and the markets. Although the markets are becoming ever-increasingly competitive, everyone now has the means to learn much more than someone 50-60 years ago with an electronic device and the internet.

Again, there is no perfect system. There is no magic number of screens to have, or a magic trading software one has to pay for in order to invest successfully. One can get by with publicly available financial websites like Yahoo Finance, along with a spreadsheet application like Excel, and not be anywhere near as behind the professionals with Bloomberg Terminals as he or she may think.

Apps like Robinhood are specifically bringing commission-free trading to the masses, specifically young people. Couple that with the recent advent of ETFs that bring an unprecedented amount of diversification in an accessible tradable package, I think that everyone should get started, or at least involved, with the act of investing.

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