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1. Guide to Invest in Stock for a Beginner

2. • Learning to invest in the stock market is different
from say, learning maths.
• Whereas everyone eventually reaches the same
solution in the latter, there’s no one right answer
on how to invest well.
• Nonetheless, there are similarities between
learning the both, or any sorts of skills.
• The fastest way to learn a skill is to deconstruct it
by breaking it into pieces, strip down to their
essence, and examine the fundamentals.
• Fundamentals provide a solid foundation, like a
strong building holding up against stocks so that
you won’t fall apart during a market panic.

3. • Investing is a slow learning process, same as
everything you set out to do, like a car in first
gear going uphill.
• And don’t worry about missing out
opportunities. If the boat is not in the right
direction, it doesn’t matter how fast it goes.
• Instead, aim for 1%, strive to improve yourself by
1% every day, it adds up over time.
• Build a long runway, and focus on what matters
and ignore the trivial. When your knowledge
compounds, your wealth follows.

4. • In the stock market, every share you own is a slice of ownership in
the business, essentially, you are the owner. You are entitled to
vote, receive a dividend, if there’s one, and participate in the
fortune of the business as a shareholder.
• You grow your wealth through the dividends received, and share
price appreciation as the company makes more money.
• Most investors watch their shares like a hawk, reasoned a drop in
share price would impair investment capital. That is true if the
shares are sold to realise the loss, but otherwise, flies in contrary to
the mindset of an owner.
• If an asset can be acquired at a lower price, in this case, the whole
business, isn’t that a positive thing? As opposed to a falling share
price, the risk of an investor comes from not knowing what he is
doing.
• If one buys a property but never take the trouble to inspect or walk
around the neighbourhood, is it a surprise if the house is in poor
condition sitting in an unsafe area?

5. • Similar to doing research before getting a fridge, a car, or a house, a
big part of investing lies in preparation, doing the work before
buying, and spending the time to understand the business.
• This knowledge creates a psychological edge, and the ability to
think independently, a rare and valuable trait in investing during a
market panic. You can assess the situation with a calm head before
making the right decision rather than rushing to the exit doors like
everyone else.
• Your profession or things that surround your daily life are good
starting points to learn more about business and industry.
• If you work in the I.T industry, chances are you will be familiar with
some software providers; if you are a car enthusiast, which stores
do you always visit and for what reasons? Even if you’re a stay at
home mother, you might have developed a good understanding
where to find quality ingredients.
• By observing things around you, you have a good judgment on
what’s selling, and what doesn’t. Look for the label; find out which
company produce it and how well the business is doing.

6. • Given a choice between an excellent and an average business, you’ll prefer
to invest in the former. But how do you distinguish the former from the
latter? Is there any characteristic that defines a company as wonderful?
• If one of your friends comes to you with an idea of starting a business
together, you will ask questions like:
• 1. What kind of business is it?
• 2. How much investment do I have to put into the firm?
• 3. How much money can the business make every year and how fast?
• The first question focuses on having a good grasp on what the business
does. If your friend is going to start something that you can’t get your
head around, never get involved.
• The subsequent two questions are the litmus test to see how attractive an
investment can be, or how wonderful the business is to start with
something simple. If you decide to open a savings account, you would
prefer a bank that offers a better rate; say 2% instead of 1%.
• To express it in an equation:
• The savings account earns you $2,000 / you have to put in $100,000 = you
make 2% return
• Or put it another way:
• How much money can the business make / How much investment to put
in = X% return

7. • To simplify it:
• Profit / Shareholders Equity = X% return (Return on equity)
• Shareholders equity means the total amount of money that has
been put into the business. Return on equity or ROE for short,
expressed in percentage, measures how well the business is
generating a return on its investment.
• In the savings account example, you get a 2 cents return for every
dollar of investment or a ROE of 2%.
• A business can report they made 1 million or 100 million in profit,
but that information has little value without knowing how much
investment had been put in.
• The ROE decides how attractive a business is. In running analogy, a
runner’s performance is determined by the time required to achieve
an X amount of distance.
• In investing, it is the investment needed to generate an X amount of
profit that determines the share price & business performance.

8. • As shown above using two businesses as a comparison, business
wonderful can produce 20 cents of profit on every dollar of
investment per year, compared to 10 cents of profit by the average.
• Therefore, it is producing a profit at twice the speed of average.
• Using the Rule of 72 (last row), which is a quick way to estimate
how long an investment will double given an annual rate of return,
you will reach the same conclusion.
• The wonderful can double the return in half of the time it takes for
the average to do so, 3.6 years instead of 7.2 years, due to its ability
to generate profit at twice the rate.
• So it makes sense to own a high ROE business than a low one, but
there’s a catch. Wonderful business commands a higher share price
(in about average ones) because investors are attracted to its
wonderful future prospect and they are willing to pay up for it.
• This is an important point as share price and future return has an
inverse relationship.

9. • To understand this relationship we have to start with the concept of price and
value. To put it simply, price refers to share price, the numbers that goes up and
down every second, whereas value refers to the value of a business or how much
it is worth.
• You can easily find out the price of stock, but the value of a business is obscure.
• In general, the share price is a good reflection of how much the business is worth
over a long time frame of 5 to 10 years. However, in the near short term, the
share price is driven by the manic depressive emotions of investors.
• Factors from economic outlook or company specific news such as earnings
release constantly affect the market sentiment. As a result, the market can be
overly pessimistic or optimistic on the future prospect of a stock and from time to
time, causes the share price to deviate away from its value.
• A brilliant adage describes the market as a beauty contest in the short term, and a
weighing machine in the long run.
• In the short run, investors tend to flock to popular stocks that are a flavour of the
month, in disregard of the business fundamental and push up their share price in
the process.
• But ultimately, it is the performance of the business that determines the share
price over the long run. So when over-optimism causes the share price to
increase, the future return is likely to be lower because, over the long run, the
price will self-adjust and return to where its value is.
• Hence, there is an inverse relationship between share price and future return.

10. • Going back to our wonderful example above, that
means yes, you’ll want to own a wonderful business but
without overpaying for it.
• To illustrate this further, you decided to buy a stock
with a great record of generating 20% ROE per year. If
you buy it:
• 1. At a fair price, where price equals value, the share
price return will be similar to the return of the business
in the long run, which is 20%.
• 2. At a high price, where price exceeds the value, the
share price return will be less than 20% as price adjusts
downward to reflect where the value is.
• 3. At a low price, where value exceeds the price, the
share price return will be more than 20% as price adjust
upward to reflect where the value is, followed by the
20% ROE return of the business.

11. • Price will always revert to where the value is over the long run. Therefore,
if you overpay for a stock, you run the risk of getting a dismal return or
worse, impair your capital permanently.
• Many think that a business is worth a buy regardless of the share price,
that’s no different from a property agent telling you, a house can worth any
price because it has the best location in town.
• At a certain price, a business can give you an above-average return; at a
higher price, the return becomes average; at an even higher price, the
return will turn dismal. Price is what you pay and the value is what you get.
• The emphasis here is to buy stocks at a fair price or even better, at a low
price. When do stocks usually sell at a cheap? When the market turns
manic depressive and everyone is cramming at the exit door.
• The psychological makeup of thinking like a business owner is inherent
contraries. When share price is soaring, and the crowds are jumping on
board for fear of missing out, you stay prudent; when the share price is in
free fall, and the crowds are jamming through the exit door, you turn
aggressive.
• The mindset of following the crowd is naturally wired in our brain;
therefore it feels safe and natural to follow the majority. But where will the
advantage be if you do the same things as others?

12. • As the value dictates your investment return, you need a good grasp on how much a
business should worth to find out if it’s expensive, fair, or cheap relatively to its
share price. The value of a business is not a precise figure but an estimate of range.
• Unlike share price, which is susceptible to a big swing in market sentiment, the value
of business tends to be gradual, changing slowly from year to year.
• The main ingredient to good estimate starts with a good understanding of the
business. Using the analogy of guessing age, there’s a better chance to take a correct
guess on someone’s age as compared to an animal’s.
• Why? Because we grow up around the people, where every person acts as a
reference point, which can be easily accessible by memory for cross-reference. This
is why it is critical to understand the business or any estimation will be way off the
mark.
• While a good estimate is a must, precision is inessential. You don’t need to know the
exact age to be able to tell if a person is in his/her 20s or 50s. Put it another way,
wait for the market (crowd) to make a huge mistake.
• When the market is pricing a stock that’s worth $100 to $200 at $50, you don’t
need to be precise to be right. This serves two immediate benefits. By treating the
value as a range of two numbers, you are free from the stress of being precise, and
in the process, reduce your losses and maximise gain.
• During the market panic, fear overwhelmed rationality. People wants to avoid
uncertainty at all cost, as a consequence most stocks get oversold. When you buy a
stock selling at a dime to its true value, your entry price dilutes the risk of any bad
outcome, while increase chances for above average return.
• The common phrase ‘High-Risk High Return’ is true, but this is something better,
‘Low-Risk High Return’.

13. • If we are to summarise this post into a sentence, that
would be - Buy a business that’s worth a dollar selling for
50 cents.
• I have presented little calculation to keep it simple and
underline an important aspect of investing. A good grasp of
accounting and maths are important, but you will do fine
with basic arithmetic.
• What’s more critical to the success over the long run lies in
having the right temperament, and the ability to think
independently. Not having the right attitude will give you
the biggest disadvantages in investing.
• Although learning how to think well is beyond the scope of
this post, but I sincerely hope that these fundamentals will
serve as the bedrock for your investing journey.
• Something for you to anchor on, perhaps, to discard as well
(think independently) should you find other fundamentals
that can serve you better.

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