Sometimes, I don’t know if it is a good thing to tell people that I am invested in the stock market. It is a dilemma because I don’t quite like all the responses that I am getting from the other party.
Friend A: “Wow really ah?! How much you earn already? Can buy car?”
Friend B: “My auntie’s uncle’s son is insurance agent then he/she also do this one. Very rich now already!”
Friend C: “Thanks for telling me! Can tell me what stocks to buy or not?”
Friend D: “I don’t believe in the stock market. It’s like gambling.”
Friend E: “I/my parents/my relative that time GFC lost a lot of money you know. Kena burn hand before. So bad until that time have to downgrade his property and almost declared bankrupt. You better be careful!”
Other than Friend E, which I think is legitly concerned for me, I honestly don’t know how to answer the other three questions. As for Friend D, I (note: sometimes) try to think of something within that short period of transition while he/she is waiting for my reply to try and convince him/her otherwise.
Me: “Why do you think that it’s like gambling?”
Friend D: “Aiyah, last time try to invest for awhile but also didn’t do so well. So hard to predict the price, don’t know whether will go up or go down one.”
Me: *swallows* “Yeah, that’s true.”
Well, I can’t fight that anymore, can I? There’s no way I can predict that too.
Now, I may be new to the stock market, but I know that there are differences between gambling and investing. Although some elements of investing do resemble gambling, for example, being able to earn money from an investment as you have made a “lucky” judgement on a particular stock, there is something else that is brought to the table.
When you gamble your money (say for example, playing blackjack), the odds of you winning are kind of fixed by the probabilities and combinations of the card deck. If you were to know that your chances of winning a blackjack round are a mere 0.000001% (maybe even lesser, who knows?), would you want to place your entire net worth on that one particular round? The answer should be pretty obvious by now.
When you invest your money into a company, you are, by definition, an owner of that company, and part of the business now belongs to you. Now, you have leverage, and it is no longer just mathematically possible. Choosing the “right” people to work for you and a business that you can understand would make more sense now.
If you are also able to see that the price you have to pay for buying each share being equivalent to how much you are willing to buy the entire business for, would you want to buy a business that is overpriced?
Perhaps – if you think that it is a really good business.
But what if you can get that same piece of the business, only this time with a bargain, or at least at a relatively fair valuation? Your position would be different, and we can also safely declare that you are taking less risk now as your losses are automatically reduced in the event that you have made a wrong judgement.
So the higher the price you pay, the riskier your position will be.
Therefore, it is pertinent that you decide for yourself what price would you be willing to pay, what the business is really worth (usually known as the intrinsic value of the business/stock), and how “safe” you are from losing/earning money even before you buy a stock.
And this is the concept of the margin of safety. Or at least it’s how I believe it to be, as derived from the books that I’ve been reading. It’s all about managing your risk and evaluating your losses.
Maybe I’ll tell this to the next Friend D. If he/she comes along. :p
Thanks for reading!
Miss Niao xoxo