This is no workshop or a tutorial on how to invest in the stock market. It's a discussion about what differentiates speculation and good investing. Anyone can join me in the discussion, even if you know nothing about hte stock market. It will be a good introduction for you. Every week now, the s&p500 is reaching record highs, and companies like the mag 7 has contributed to more than 30% of the returns. So there's no doubt the US market is expensive, more expensive than it was back in 99-2000 with the telecom boom (if you're old enough to remember that). But if the market is expensive, and with uncertainty of the tariffs, how should we go about investing in it?
Picking up good businesses to invest in the market is not a science, it's an art. There's no formula one could teach that we can apply every time and gain profits from it. The key thing is to understand what we invest in, and buy it in the right price.
There is no such thing as bad investment or good investment, any investment can be great at the right price, and also terrible at a high price. Imagine we have a gas station up for sale, it costs 500,000 thousand dollars, the business generated 50 thousand dollars in operating profit this year. Is it a good investment or bad investment? Well keeping things simple, it will take 10 years to get our investment back (it will definitely take more than 10 if we add a discount rate of inflation in future incomes) but for simplicity sake let's just take this number. Is it a good investment or bad? Maybe the business is good but the price seems a bit high. Now 1 year later, the same business owner wants to sell the business for 300,000. Maybe his wife got sick and he has to care of her, or maybe he's just too old himself to run it, or... you get the point. He wants to sell the business in a hurry, and that's a 200,000 discount from the original price he was asking for a year ago! with the similar operating income, if operating conditions are same, even an inexperienced gas station owner can tell that it's a big discount from the original price. But is it a good buy? We need just one thing to make a judgement now and that is EXPERIENCE running or either working in a gas station.
The stock market goes through a similar volatility period throughout the year. Ben graham in his classic book "Intelligent Investor" used a metaphor to describe the stock market as a bipolar business partner which he calls Mr. Market. Mr Market every weekday from 8.30am to 3pm offers us a price to buy or sell a stake in his business. Sometimes he is afraid and offers us cheap price for the share, sometimes he's very excited and offers a very high price. If we like the price we can buy it or sell it, but we can say No to it every day he won't mind. He never minds! The market is not there to guide you, it's only there to serve you, it is our decision what to buy and when to buy it. This is the core fundamental of any good investment strategy and this is what we're going to discuss in this environment of high speculation.
