After popping up 8% on the first day of its IPO last Friday, Lyft’s stock dropped by almost 12% today. That’s what I find baffling about the stock market. How much of the business could change in the span of 4 days? I haven’t encountered news that could justify the drop of that size. What changed? Will it go further down tomorrow? Or will it shoot back up again? And by how much? I literally have zero idea.
Charlie Munger once said that if you want to make money by buying low, you have to know when to sell high and it’s hard. Given what I have seen so hard, he is right. You don’t know when it is “high” enough to satisfy your own greed. Some may say that determining an intrinsic value of business by discounted cash flow (DCF) will be helpful in knowing when to buy and when to sell. That’s true, but DCF itself isn’t an easy and straightforward practice. It’s really hard. Here in this clip (around 6:50), Charle (not sure if he was 100% serious) mentioned that he never once saw Warren Buffett do a DCF. Plus, a renowned expert in valuation, Aswath Damodaran, admitted that he missed the mark way off when he tried to value Uber in 2014. I once participated in an M&A competition with three of my close friends. In the course leading up to the contest and the contest itself, we had to do quite a few valuation with DCFs. The method involves a lot of assumptions and it’s more art than science. Each company requires a different approach and almost no valuation is the same. If an expert such as Professor Damodaran struggled to get it right, what are the odds of ordinary folks nailing it? My money is on the “not very high” bet.
I don’t know a perfect method in investing, but I agree with Warren Buffett that buying or selling on prices is not investing. I’d recommend these two books if you are interested in life advice and investing. Poor Charlie’s Almanack and The Most Important Thing: Uncommon Sense for The Thoughtful Investor. If you have time, read more from Charlie Munger. He is really a wealth of wisdom. Plus, you can read financial reports (SEC filings of the companies) or S-1 if companies are filing to go public and subscribe to Seekingalpha.com or Yahoo.com to read the transcript of their earning calls. Plenty of useful information can be had from such sources.
I have my own reasons to invest in the companies in my small portfolio and if I go bust, at least I will learn a ton about business and go out on my own terms.
Minh Quang Duong 