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).

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