SUMMARY
- Many investors were excited about hot stocks like Snap Inc.
- After its recent earnings, investors had a glimpse of what is it like to chase after trendy and fashionable stocks.
- Here are 3 quick takeaways about what investors can learn
1. Introduction
On 02 March 2017, investors’ anticipation the long-awaited debut of Snap Inc (NYSE: SNAP) on the New York Stock Exchange has finally come to an end. Since then, the parent company of the SnapChat has been a very volatile and shareholders are required to have a strong stomach if they want to hang on for a long time. The issue here is why would investors be even interested in a company like Snap Inc?
- A Game of Hot Potato
[Source: Google Finance]
As I write this article, Snap Inc is trading at $19.90 a share, down roughly 20% since the time it went public. For investors who rushed in at the start to chase this “hot investment”, they would be sitting on a sizeable loss – for every $1 that was invested, they have only $0.80 left.
As values investors, we are much more interested about looking at a stock as a business and we should learn not only from our failures but from others’ too. Here are 2 quick takeaways about what investors can learn from here.
Lesson 1 – Investing is most intelligent when it is business like
Much of Snap’s almost $24 billion valuation is based on hope and how it will turn out in the future. In other words, investors are giving credit for an achievement that has yet to materialise.
If one were to take a look at Snap’s financial statements, he should be aware about the dangers of investing in a company like Snap. The company generated $404 million in 2016 while posting a loss of almost half a billion dollars. The prospectus that the company issued prior to its IPO has already indicated a sprawling number of red flags in this company.
Knowing this, the first thing investors should do is to understand the underlying business of those companies. Remember that investing in stocks is the equivalent of investing in a company as well. As Warren Buffett puts it, investing is the most intelligent when it is business-like.
Lesson 2 – Greed will only make you poor
Many investors today will remember major events which triggered market crashes. Events like the dot-com bubble and the demise of Lehman Brothers have one thing in common; investors got greedy and behaved in ways that would hurt them.
Will these events repeat themselves again?
To answer that question, answer this one first: What was the main cause of market crashes? If your answer is that it was caused by a lack of sound judgment and carelessness, then we can probably learn from those events and not repeat our mistakes in the future. We will be able to put countermeasures in place so that other investors and market participants will be aware of the pitfalls and avoid them. However, if your answer was that market crashes are usually caused by greed, then we can say that it will surely happen again in the future.
Why is that? Because humans will always be greedy. And greed can make us do some really foolish things.
Conclusion
Sure, hot stocks can make you wealthy beyond your wildest dreams. But more often than not, chasing them can be hazardous to your financial health.
Investing in a business should be simple – buy a profitable business that you understand and people care about and you will be just fine.
Marcus Ho
Research Analyst, Mind Kinesis Value Investing Academy
Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.