5 Things You Should Know Before Buying A Stock

Here are my quick fire summary of fund manager Danny Wong’s 5 Things You Should Know Before Buying A Stock from my interview with him on BFM’s Ringgit & Sense. If you have more time, check out the podcast to get the full context for these 5 points, and to also learn about valuation metrics, 3 lessons from the GameStop Saga, and assessing loss-making companies (like Uber).

1. Understand ourselves. It’s imperative that we understand our limits and risk tolerances before investing, and this is easier said than done. A key thing I watch is how well I can sleep at night, whether an investment causes me perpetual anxiety. If so, something is wrong. Either I haven’t done enough research to justify the investment or it’s beyond my risk tolerance.

2. Understand what we’re investing in. I know, sounds like common sense right? But it’s crazy how powerful FOMO can be. I’ve personally made this error a few times, only to lose money in the process (overall). It’s important to understand the mechanics of whatever we put our capital into, be it stocks or even a business. You’re essentially buying a piece of ownership a business, shouldn’t you understand how it makes money, who is running the business, it’s growth trajectory and the market it’s in (among other things)?

3. Insist on a Margin of Safety. Basically buy when a stock you’re watching is SIGNIFICANT below it’s intrinsic value. A little below does not make a margin of safety. Now this is a tricky one because it depends on our ability to assess the intrinsic value of a stock, which essentially means determining the value of a particular stock. For this reason alone, I highly suggest you listen to this episode of Ringgit and Sense, I spent quite a bit of time with Danny on how to value stocks.

4. Understand The Market Dynamics. Beyond understanding the stock at hand, you’ve also gotta watch out for the external environment and the various factors that impact market dynamics. Some major ones are: economics growth, corporate earnings, market liquidity (which is particularly important to watch with all the central bank action we’ve seen over the last year), market risk appetite (bullish? Bearish? Mixed? Confused?), and regulatory changes.

5. Monitor Investment Post-Purchase. With all this in mind, it’s important to keep an eye on all the factors that impact the valuation (or future value) of the stocks you’ve invested in. Things change, so you’ve got to watch out for changes that impact your valuation assessment. Examples: pandemic (COVID-19’s boost to tech and destruction of brick and mortar), death of founder or CEO (what is Elon Musk dies?), changes in regulation (think Ant Group), and changes in central bank monetary policy (what happens when they start being less accommodative?).

Again, this is just a quick fire summary alongside my own thoughts based on the conversation I had with fund manager Danny Wong of Areca Capital on BFM89.9’s Ringgit and Sense. — Subscribe to Ringgit and Sense! – BFM — Spotify — Apple Podcast

Listen to the full episode to get a better understanding of the above points, but also to learn about valuation metrics, 3 lessons from the GameStop Saga, and assessing loss-making companies (like Uber).

Links: Ringgit and Sense

Subscribe to Ringgit and Sense! – BFMSpotifyApple Podcast

Episodes (From Latest to Oldest)

5 Things You Should Know Before Buying A Stock & Lessons From The GameStop Saga

  • Guest: Danny Wong, CEO, Areca Capital
  • Episode Summary: What lessons should we learn from the GameStop Saga? Want to invest in stocks but don’t know where to start? What is the bare minimum you should know before buying a stock? What does a PE ratio mean and why is it important? Roshan Kanesan explores all this and more with fund manager Danny Wong, CEO of Areca Capital.

Wedding Planning: Critical Advice, Common Mistakes, And Taking On Debt

Guest: Suraya Zainudin, Personal Finance Writer, ringgitohringgit.com and Nirmala Supramaniam, Head of Financial Education Department, Credit Counselling and Debt Management Agency (AKPK)

  • Episode Summary: How much does a wedding cost? Should you take on debt? How do you manage familial and societal expectations? In conjunction with Valentine’s Day, Roshan Kanesan explores all this and more with recently married personal finance writer Suraya Zainudin and Nirmala Subramaniam from the Credit Counselling and Debt Management Agency (AKPK).

Title

  • Episode Summary:
  • Links: BFM — Spotify — Apple Podcast

What I Learnt – Mr. Stingy’s 2 Key Lessons from 2020

Aaron Tang has been writing under the pen name ‘Mr. Stingy’ for 6 years now, and ever since I was first introduced to his work, I’ve been a fan. He does a great job breaking down and explaining concepts, whether about life or money, both in his writing and the several times I’ve had him on BFM’s personal finance show Ringgit and Sense. 

Last week I had the pleasure of having him kick off my personal show ‘In Conversation with’. We talked about lessons from 2020, his favourite resources, and how he balances his 9-5 job, his home life, and running Mr. Stingy. In today’s post I’ll get into Mr. Stingy’s 2 Key Lessons from 2020 (Minute 6:00-9:00 on IGTV)

Number 1: Life is unpredictable.

No one saw the pandemic, how much damage it would cause, or how widespread it would be. This has been the biggest demand disruption to the globe since World War 2. To this point, he noted the importance of emergency savings and specifically mentioned an anecdote about Bill Gates and Microsoft’s early days, how Gates always kept 12 months of company expenses on standby, at all times:

Without a doubt, Bill Gates is a genius. The Microsoft co-founder dropped out of college at age 19 because he believed a computer should be on every desk and in every home. You only put a lot of money and time into something when when you have relentless confidence in your abilities. But there was another side of Gates — quite the opposite of his unshakable confidence. From the day he started Microsoft, he insisted on always having enough cash in the bank to keep the company alive for 12 months with no revenue coming in. As a result, Gates erred on the side of caution.

Excerpt from CNBC Make It (by Morgan Housel)

At the end of the day, the Emergency Buffer Fund is there to help protect us and cushion the impact from events that we don’t see coming — to help supplement, or even replace, lost income should something happen.

The general gold standard here seems to be 12 months of expenses, but that will take time. So as you make your way towards that goal, let me share something Licensed Financial Planner Rajen Devadason has told me – keep at least 2 months at minimum. Why? -Because one month (at super best) to secure a new job or income source, and another month before your new salary comes in.

Let me close off this point with this passage I wrote for Mr. Stingy’s blog:

“Specifically for 2021, focus on building your emergency buffer fund. It’s always exciting to talk about investing and assets, but what I’ve personally learnt from 2020 is the need to be prepared for the unexpected — to help ease my mind and sleep better at night. A year ago or so, things were very different and so were my priorities. We weren’t expecting rampant pay or job cuts, so while having a buffer fund wasn’t top of mind then, now it is. With some reprioritizing of existing assets, I’ve managed to reach 6 months of conservative expenses, but I’m aiming for 12. It’ll take me time, but for peace of mind, I feel it’ll be worth it.”

Excerpt from 17 Influencers Share Their Best Money Tips For 2021

Number 2: Resilience and Optimism.

Aaron’s second lesson was about resilience and optimism, specifically saying: “People are very resilient, people will adapt. No doubt we will go through bad periods of time, and hopefully those who have more will help those who have less. People will struggle, there will be pain, but long term I’m optimistic”.

This might not be a key lesson for others who are generally more optimistic, but it’s a personal lesson for Aaron and is tied to the fact that he described himself as someone who comes from an “apocalyptic view”.

From my understanding, 2020 showed him real human stories of resilience and adaptation, and that while many are going through a very tough time right now, he believes in the long term we will recover, which might be a change of perspective for him from before the pandemic.

On the note of helping others, Aaron puts his money where his mouth is. In 2020 he said he would donate over 80% of blog revenues to charity.

I’ll probably make RM 20,000 this year from mr-stingy. I’ll donate at least 80% to charity (the rest is just to cover my costs). And as long as my day job holds steady, I’ll commit to spending as much as I was before the crisis.

In my next post, I will get into Mr. Stingy’s top 5 resources for 2021. If you can’t wait for that post, you can watch my interview with him here (jump over to minute 12:30).