To The Moon

Hello everyone,

I'm Stone,Wish everyone good.

Today, I would like to share some experience about operating a stock account with you. In the second part, I have added some experiences from reading financial report.Hope these contents can be helpful to you.

There has been a constant debate in the market about which is the most effective, which is the best way to get good returns or which is the most effective way to protect against risk.I believes that in the market, the winner takes all.

The reason of the winner-take-all is because you see something in the investment market that you don't see in any other market: regardless of age, seniority, wealth, or experience, the rich guys always go after the winners and are willing to give them their own assets and put them into the stock market.

These "winners" may be various professional scholars, recent graduates, office workers, enterprise managers, entrepreneurs, we-media, or retired grandparents, or they may not know gender, age, occupation, or even whether they are the latter of human beings.

This has never changed since the incorporation of the joint stock corporation.Some of these successful investors concentrated their holdings, some diversified, some made a lot of money and retired, and some made their names in the market by compounding interest.In my opinion, as long as you can make money, there is no problem with these two strategies, whether it is concentrated shareholding or diversified investment. The important thing is how to find the investment style which suitable for you,That's important.

Buying and selling stocks is buying and selling shares in a company, not something ethereal;As the company continues to create profit value, investors enjoy the results.

Entering the speculative world, it's easy to fall into the lap of smart-mouthed investment gurus who want us to believe that bombed-out returns, obscure mathematical formulas and unheard-of advanced concepts are the reason we hand over our money to them.Sometimes we even engage in self-deception.

Opening a stock account is like setting up a company

No matter what kind of company is founded, it has a main business.We have to be very careful about companies that don't have a major business or have a very big name that can do anything.It is the same when we operate the account and choose the investment. If we have no main idea, we buy everything and involve in any industry, the result is often disappointing.

After the establishment of the company, while operating the main business, it also needs to update products regularly, learn new technologies and adjust the direction of its products.There are few eternal products in the world, let alone perpetual motion machines.It is also hard to find the kind of business that can stay the same and generate a steady stream of profits.

If I was lucky enough to find such a company, the first thing I would do is make it the main business of my account,By holding its shares for a long time, and the account would compound over and over. (I could write a long article about compound interest in the future if guys interested.)I have sorted out the yield of account A (which is also the account I have been using to show) and the chart is as follows:

Find the right way to invest your money

During the year of 2020, I participated in investment in many markets: the US, China A shares, China H shares, Australia, the UK, Germany; I spread my money around like sand, with four accounts in the U.S. market.Can be a true sense of the achieved "diversification".

The ideal is full, the reality is very skinny: when the stock market began to go out of tide I was dumbfounded --Holding too many companies, industry fragmentation.These holdings can not look over, as a result, the brain can not turn, almost 24 hours of mental stress.

It is true that diversification allowed me to make profits in many industries when the stock market was going up, however, when the rally ends, the damage comes.

In 2021, it is no surprise that the companies shares price held in the hands began withdraw, and the whole year will be spent paying for my blind and arrogant mistakes: sorting out the account holdings, reevaluating the shares held in the hands, selling the bad shares, holding on to the good companies, and keeping a certain amount of cash.

I am not at all afraid of a pullback in the good stocks, but I am very anxious about a pullback in the bad stocks.

As Benjamin Graham said,

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Not all parts of the company need to be profitable

As we all know, no matter how good a company is, it is impossible that all departments should be profitable.

Some departments are unprofitable, but still necessary.These departments may always show up as expenses in the annual financial statements, but that doesn't mean they're bad, need to be cut or reduced.

But when the core earnings division shrinks, it becomes more serious.Briefly compare sales and customer service.One is created to make money, and the other is designed to help the company make more money.Any major changes in either division could signal trouble at the company.

For our stock account is the same way, some stocks can be held in a certain period of loss, but does not represent a long-term loss;Similarly, some stocks that make money in the short term may not represent that they can make money in the long term.

It doesn't matter if individual stocks make or lose, I'll take the whole account as a whole.As long as it's profitable overall, it's fine.So I had to decide whether I owned a losing customer service company or a losing sales company.I can keep the customer service department, which is losing money, but I will never keep the sales department, which is declining.

If the market is doing well, I'm willing to hold the company for a year or two and see what the price does.However, in the case of severe market volatility, they usually choose to recover part of my funds.

I prefer to use the money to buy some technology companies that shares price has fallen a lot by the market or whose valuation has returned to normal.Or solid rising stocks like the ${{73d87eec5f934fe1a71956444673d491}} , which has a lot of potential, or $Berkshire Hathaway(BRK.B)$ which is more stable.After a year or two, this lost money can be returned to your pocket.

At present, I have a few more stocks to sell. Sure enough, diversification is not for me, and buying and buying without fully understanding the company keeps me up at night with anxiety.

Concentration does not mean high risk

As mentioned above, after I collated the returns of each account, I realized that diversification is not necessarily to spread the risk, but also to spread the profit.

Spreading too much money into different industries would make me scramble.I went back through my own investment history (2009-2022) and found that the vast majority of profits came from individual companies, not portfolios.

It is my style to research companies deeply and then continue to buy those companies with deep research and consistent profitability with my capital.

I did a comparison with my four accounts in the U.S. market:

• Account A: It was also a demo account. Under the condition of "laying A good foundation" (stock holding after selecting the company will not be moved), it looks for some high-risk and high-return "growth stocks".
• Account B: Most of it goes into promising companies, some of it goes into finding new legacy stocks
• Account C: Diversify my investment, not putting all my eggs in one basket, and pick potential stocks in all industries;
• Account D: Concentrated investment in several promising companies after the survey, and hold the stock

After 2 years, account A beat account B and C by A tiny margin, and lost account D.

Yield rate: D>A>B>C;

Account A bought a maximum of 13 company shares, account B bought a maximum of 8 company shares, Account C bought 9 company shares and Account D only bought 3 company shares.

In account A, which I repeatedly operated, I won several other accounts in A single quarter or year. However, as time goes on, account A's advantage is getting smaller and smaller.I have tried to buy growth or oversold companies, mostly on the basis of 'speculation' rather than the slower but less risky ones I have delved into.

Knowing whether your capital is safe and whether you can get the expected return on your investment takes some research and analysis, but it doesn't take super intelligence or math skills.Even a proposal that others consider risky can be a good investment opportunity for you if you have the right information.Fortunately, the information on which decisions are made is readily available today

I've looked closely at portfolios that look scattered but are concentrated: Some investors love tech stocks, buying more than a dozen of them and making good returns when the stock goes up.However, once these high-growth companies hit a bottleneck, or a collective pullback in their share prices, they are almost completely retracted, and the end result is not much different from the misjudgment of concentrated investment.

But the amount of effort that goes into picking a company is different.As independent investors, we cannot have the same "brain trust" as institutions. After all, two fists are no match for four.Spending the same amount of time to know more than a dozen companies, and spending the same amount of time to know more than a few companies, these two ways of final judgment, choice will be different.

This diversification is more like putting eggs in several baskets and then loading them all into the same car.If the car turns over, no one can get away with the basket.

So instead of trying to spread your eggs in many baskets, you also need to carry each one to the car. why not consider putting eggs in a small number of baskets, you can use the time you save to check out of the car, check that the vehicle if it is at risk of accident, check that the basket is sturdy, check that the eggs are properly placed in the basket, and if you find any problem, quickly remove the baskets.If not, one basket full of eggs can fetch a good price when waiting for the car to drive to its destination.

Reading financial reports is one of many inspection environments, just like checking the condition of a car which loaded with baskets of eggs. Even if it passes the inspection, it does not mean that there is no any risk of car accident, and the eggs in the basket will not be broken.

There are many reasons why an egg can break in the basket, and the same is true when you buy a company's stock. It's not enough to just read the earnings report. The numbers game is deeper than you think.

The quality of the company's development is also linked to the CEO. High salary does not mean high capacity. Similarly, the quality of a single financial report cannot tell whether the company will develop well or badly in the future. What we can do is trying our best to check whether there is any unnormal in the whole process and reduce the risk to the minimum.

That's what investing is like. It's like starting a company or a business.

A single quarter does not tell you whether a company is good or bad

When reviewing financial reports, a single quarter doesn't tell you too much.Some contracts are wordplay, and when you sign them and read them carefully, you'll see that they're wrong, and when the project is running, this wordplay becomes even more obvious.

Financial reports also have a similar, that is, the "number game", such as the EBITDA marked in financial statements, in which the uncounted items really do not exist?How do you measure things before interest, depreciation and amortization?

Read at least the company's annual report and previous quarters (if any) before reading the quarterly results and compare the numbers for each report.Watch out for numbers that jump so much that they're up 100 percent in a single quarter, or more than 100 percent in profits for the whole year.

Is this imaginative growth real?Or is it produced in a different way?Or is it quarterly, or is it just a "numbers game" given by a new boss?

Take an extreme example (not rigorous, just a simple example) :

A company suffered a loss of $5 million in Q1, but its EBIT in Q2 was positive at $500,000 , with an increase of 110%. Then, combining Q1 and Q2, do you think this company lost money or made money, or can it grow 110% in the next quarter?If you go by EBITDA, you could have a positive EBITDA of $1m, an increase of 120%.When considering EBITDA, is Q3 forecast positive 6 million or positive $1 million?Or a loss?

Do these numbers represent great future potential for the company?And become a hot stock to be gobbled up?You can pause for a moment, think about these questions, and then move on.

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Unfortunately, I can't give a definite answer.That's because these numbers alone don't tell you exactly how good or bad a company is.

As mentioned earlier, quarterly or fiscal statements are not particularly useful data.You also need to refer to more years and quarters, as well as the company's main information, recent company dynamics, and the management of the company, and so on.

I think reading financial report as mentioned above the sectors of transport eggs "check the vehicle", we can through the vehicles that driver's driving habits, but in actual operation of the vehicle, the driver's status, mood and whether drinking, whether suffering from mental illness, physical illness needs more investigation, such as vehicle no problem, do not represent no any risk of accident.

Most of driver do their jobs for money or fame.We screen these drivers through financial statements, trying to screen out drivers that live for money and keep those that live for name.

You'll find that drivers who live for money don't care about the condition of their cars, while drivers who live for fame keep their cars in good condition at all times and would rather not wash their faces than get their cars dirty.

We, the investors, are the most necessary and least controlled part of the egg transport process -- loading the eggs (money) into the car, and then waiting.

When it comes to financial reports, one of the most confusing things about financial report is that some companies list "other" items.

Some of the "other" is in revenue, some of the "other" is in expenses, and the report does not make clear what these other generated numbers represent, or what the other represents.Even if some financial reports are marked with other meanings, the explanation feels like a "play on words".

That's the kind of finacial report I'd run the hell away from.Imagine carrying a basket full of eggs to the car. Now the car is loaded with eggs that many people put on it.The driver appears, blushing, ready to start the car and says, "Guess if I've been drinking?"What would you think?Dare you let this car driving out?

The other one is GAAP.Don't look at those four simple letters, but they carry a lot of meaning.Many tech companies or high-growth companies, is willing to put equity incentive plan into profit and loss statement, after the results is not good-looking. In order not to let the results appear too many losses, the company began to adjust for Non - GAAP, so we'll see some companies loss GAAP, Non - GAAP earnings.So if it were you, would you say that these equity incentives are a cost to the company?

Equity incentive is a kind of corporate management strategy, which compensates or rewards employees' labor with company stock or option.In accounting measurement, equity incentive given to employees will expand the company's share capital. In order to balance the statement, the amount of equity incentive should be deducted from the income statement. However, there is no substantial cash flow during the financial reporting period, so the measurement of this non-cash profit and loss affects the results of non-GAAP measurement.

Under GAAP, depreciation and amortization are also included in the EBITDA mentioned above.Net profit can be calculated according to GAAP operating income minus operating costs and expenses. However, depreciation/amortization policy is common and has great influence on net profit.

So far, I have not found a particularly good measurement method for depreciation and amortization.According to the fixed-assets Depreciation Method, which is in the current market,Depreciation Production Method, which is divided into "Straight-line Depreciation Method" and "Depreciation Production Method".

Don't say Internet or technology companies don't have fixed assets. There are light assets and heavy assets. I haven't heard of those without assets.Therefore, even if all are calculated according to the straight-line depreciation method, the annual line of depreciation is different, and the final impact on financial statements will be different.Therefore, under EBITDA and non-GAAP, the numbers of financial statements will make a certain difference, and these data are not a space for imagining the future, but may be a trap for digging holes.

Although it is said that EBITDA does not have much significance for Internet or asset-light technology companies, please pay attention to whether the error is too large when looking at financial statements, and whether the depreciation method of these asset-light companies is calculated according to that of heavy asset companies when they are included in financial statements.

Many public companies will tell us that the take-overs after GAAP adjustments are taken out are a more true reflection of the company, or the results of certain mergers/acquisitions.But after we understand these guidelines, will we have a new perspective on this?

So the post-earnings conference call is also very important. You need to pay attention to the CEO, THE CFO, the CTO and so on.Executives are all human, both good and bad, as the drivers mentioned above.The company's past rise and fall doesn't tell us much about the present and future, but it does tell us whether the driver is in it for the money or the fame.In this regard, I personally think it is more important for if senior officials to read PPT or express their feelings during the conference call.

As much as 90% of the conference call content is consistent with PPT, you need to be careful. Some of them even read the draft, which may not be written by themself.Those who speak authentically about the past and present and don't draw a pie around their achievements in the future need more attention.

To sum up, when you look for companies that fit our potential, you will find that the current stock price is in a reasonable range, the market capitalization is not too high, the company has a good executive, the company has a steady profit growth year after year, and the report is not a number game --

-- Too few. If you find one, please let me know.

That is, when you find such companies, focus your investment and buy them.There is no need to spread too many money among companies that are profitable this year. It doesn't have to be riskier to invest in the right companies and concentrate than it is to diversify.

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Investment is risky, follow suit is not desirable!

Regards,

StoneW