How not to invest in the stock market

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. Someone in the group chipped in and said we should buy Facebook stock, even after its stock price has risen to hit a historical high with its latest earnings report.

We asked her why. She said it’s because she can see her husband glued to Facebook, Instagram and WhatsApp every day. This immediately sparked a whole discussion.

Now let me add a disclaimer. I have invested in and own some Facebook stock, which I’m still holding on to right now. I think that Facebook, Google, Amazon, Netflix, Alibaba are all great companies and very dominant in their respective industries.

Their businesses 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 million, then it’s not a good buy.

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 percent of your money. If you had invested in Amazon at its high you would have lost 15 percent. If you had invested in Alibaba at its high, you would have lost almost 50 percent.

Yet these are all very successful companies that are dominant in their industry with no close competitor in sight.

Now we can establish that it is about the price. The next thing is to know is that the fundamentals of a business don’t necessarily carry a share price.

Its investor sentiment 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 unscalable, so its stock was on a decline.

Then suddenly the media changed its mind. They started painting Netflix very positively and its stock price shot up. Why did 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.

My personal experience with the stock market

In 2014 I made some good money in the stock market. I felt really good about myself. 2014 happened to be a year that almost everybody made money in the stock market. So it might not have been because of my skills, but because I was riding on the crest of the market.

The best bet you can make is to bet on yourself