At it’s core, when you strip away all the jargon and complexities of first or second order thinking, investing is simply a case of: buying ownership in a profitable and/or growing business. That’s really it. Profitable, growing or both.
If it’s a good business, and the management is capable, and they are profitable, and growing, it’s almost certainly a good investment.
I’ve followed this rule of thumb myself, sometimes without even being aware of it.
I bought LinkedIn during it’s IPO. Why? I had heard about it, started using it, had seen how viral it had become. Being in Business and Finance gave me a better sense of its potential and of what its IPO pricing should be. So I bought it on the Friday it opened (or Thursday, can’t remember for sure) and held it over a weekend then sold it, for a $1,300 profit. Not an outrageous sum but it was still $1300 over three days.
Netflix became all the rage at school, and I had just signed on to use it, as were a lot of people then. I didn’t buy the stock right then, because it was already high flying when I found out about the company. At the time, users got two free DVDs a month, with the streaming option all for $8. Then they announced they were splitting the DVD service into its own company,with it’s own separate $8 subscription. Users were now paying twice the cost for the same service, at a time when Netflix’s stock was riding on how many new users they were gaining. I didn’t need a fortune teller to tell me their stock would decline, so I started shorting it. When they finally announced a massive loss of users, their stock dived far more than I thought, and I ended up making almost $3,000. Again, not CBN numbers, but on a per hour basis, and percentage basis, significant. The company, smart guys that they were, quickly reversed policy and returned the pricing to normal (though eventually, they bid the DVD side of things adieu). Users flooded back, and since it was now valued more appropriately, I picked up a bunch. It’s in my Roth, doing God numbers.
I read about Tesla some time in a magazine. I remember the headline was something akin to “This could be the Apple of cars.” Intrigued, I read up about them, the CEO, the technology and I loved it. But I didn’t buy till I spotted Tesla Roadsters (a now discontinued model) one time in Key West, FL, and then spotted them all over NY. All electric vehicles, zooming past everyone on the highway and out gunning Corvettes? I knew Musk was on to something.There hadn’t been a new American car company in decades and he shows up and his cars are zipping around the place? I bought the stock. It’s done well since.
When Facebook IPO’ed, I wanted to buy. But I could tell their $40+/stock valuation was high. Remember telling my friend Stanley then who also wanted to buy to hold off due to valuation issues (I guess it helps to actually know DCF too) . The stock eventually fell to $18, though it was up back to $25 buy the time I got around to buying it. I sold it for $55, and only because I needed cash at the time.
I’ve had a number of duds as well. I bought Qualcomm and Broadcomm each because at one time they were supposed to be the main suppliers for chips for iPhones and Androids. At the time, I owned Apple. With iPhone sales zooming, BRCM and Qualcomm were bound to blow right? Wrong. The deal never happened, and the stocks went nowhere.
I bought BP post oil spill, once they had paid for clean up and compensated communities. I figured the worst was over, they’ve spent about $40bn on this and their PR was on the back swing so it was a simple matter of catching back up to where they were before the Gulf spill. Did that work out? Nope. For the next several years, they were dropping billies for lawsuits and the stock went nowhere. I ended up selling, barely breaking even.
And I missed some obvious calls: Under Amour hit the scene. I knew of them, watched them take over Athletics, all the major leagues. Did I ever bother to buy their stock? Nope.
Lulu Lemons, maker of Yoga pants for women aka everyone got ass now, aka every girl’s original best friend. I watched them spread like a virus, despite their cost, blessing every flat derriere’d woman across the globe. I knew they were publicly traded. Did I buy? Nope. I missed out.
There are so many missed opportunities like that. But the thing is, I’ve not had any huge losses either. What I describe above is something anyone could do, with much much better results. Any one.
You don’t have to be a Gordon Gekko to know this. You just have to be observant, buy companies whose products you know well and use, and actually invest in learning how to do a Discounted Cash Flow valuation. Which by the way, is very simple.
If you start from there, everything else is incremental.
Have fun investing.