What is the essence of the stock market?

If you have invested in stocks for many years, and you already know what stocks are. But if I tell you, even if you have invested in stocks for many years, even if you are still losing money, you may have misunderstood what stocks are.

Many people think that buying stocks is investing in a company and becoming a company shareholder. As long as the company makes money, the stock price will rise. As a shareholder, you can share the economic achievements of the company’s development, such as obtaining dividends from the company, such as the appreciation of existing capital, is it not good to return cash flow every year? 

If you think so and are willing to keep close to the company's stock if you wait for 5 years, 10 years, 20 years, then this idea may be correct, I will not stop you. But if you buy stocks just to make money, then I can tell you that the idea just now may be wrong. And this idea may cause you to often lose a lot of money, do you want to know why?

First, if you are in the following three categories, you must be careful.

The first type of person buys stocks to collect interest.

Many investment books or courses, and all those who advocate people buying interest-bearing stocks, such as bank stocks, pay a lot of dividends. Is this a good thing or a bad thing? The advantage is that there are no special circumstances in the stock market, and investors do get some dividend returns.

The reality is that many people do this and get a 5-6% dividend, ignoring the company's decline of more than 5-6% during the stock market turmoil.

For example, many people like to buy HSBC. Before paying the 6% dividend, many people hope to get a 6% dividend. They will not hesitate to buy each month and try to borrow money from other places with lower loan interest. 

Buy HSBC Bank with high dividends, try to use the interest earned on stocks to repay lower loan interest, and make money in the middle. As a result, HSBC suddenly announced that it will stop paying dividends this year.

So far, the stock price has fallen by more than 60%. In other words, the stock price drop is equal to a 10-year dividend. Investors who borrow money to buy arbitrage transactions will suffer more losses. Maybe someone will refute the stock price rebound sooner or later, but I can tell everyone.

There are many other examples of irrecoverability all over the world. Also, if the stock price falls too much, it proves that there must be something wrong with this company and may not be able to distribute a 6% dividend to you in the future. 

For example, if you buy HSBC at $100, the dividend at that time is 6%, you can get $6 per year, but if the stock price falls by 50% to $50, if it continues to maintain a 6% dividend, but 5% $50 is only $3, in other words, you risk a loss of -50% and get a 3% dividend.

Consider carefully, is this a wise investment decision? Of course, I know that before someone buys stocks, I have to do a lot of homework and analysis. 

I think this company is promising and the stock price will rise in the long run. It can only be purchased before maintaining this dividend payout ratio, but what if your analysis or opinion is simply not correct? What if there are black swans in this world? 

Yes, it does have the opportunity to develop in the direction you dreamed of, but don’t forget that you have the same opportunity to develop in the opposite direction, you are not the boss of the company, nor the management of the company, so you are still betting, Just bet your point of view is correct.

The second type of people, purchase asset allocation (asset allocation).

For example, buying real estate trust funds (trusts) to earn interest has been very popular in recent years. They believe that buying real estate as interest income is relatively simple compared to buying real estate. 

There is no need to deal with the tenant's problem, the handling fee is low, and the dividend is better than the rent for buying a house. But the same, if you buy at the wrong time, you will lose profits and look back at the plunge in 2020. Among US stocks, the price of stocks with a profit plummeted by more than 50%, and some even fell by 80% and then had to increase positions and share costs to reduce losses. 

When can you return to the cost price or whether the unknown still exists if you want to buy stocks as asset allocation? If you think cash flow is the most important and ignore the purchase opportunity, I will suggest you think twice.

The third type of person buys stocks because the stock price is lower than it should be.

When the market looks wrong and does not realize the value it deserves, when the market finds its value in the future, it can make a profit. There must be a reason for the low stock price, the stock price can even stay cheap for many years. Some examples of Microsoft, I believe many people will think that Microsoft is a good company. In 2000, Microsoft's stock price fell a lot, if you bought it at the wrong time, for example, after a 30% drop, it was about $30.

If you think that buying this stock is cheap, then basically you have to wait until 2014, 14 years later, this stable international well-known company, its stock price returns to the price you bought. That's right, after 14 years, its stock price rose sharply. But if you wait less than 14 years, you give up in the thirteenth year or sell the stock in the twelfth or eleventh and tenth years, the rising wave behind it has nothing to do with you. I want to ask how many years in your life?

 Are you willing to wait 14 years to reap? Don’t forget that in these 14 years, you don’t even know what the company’s stock price will be after 14 years, so you spent 14 years betting, betting that your so-called analysis and views are correct. If so, I only can tell you directly that the so-called value analysis is just a big bet.

I want to bring out the biggest point today, what is a stock? Stocks, stocks are just a piece of paper, just a piece of paper, so we only trade a piece of paper when trading stocks. Come and go, we only put a piece of paper, bought it from others, and then sold it to others, why the stock price rise?

 It’s not because of how much money the company made or how much interest it paid this year, you can find many examples in the market. Just some profitable companies, companies with very good revenue growth, or companies with very good dividends, but the stock price may also plummet.

China Life Insurance Company One of the largest insurance companies in China, you can make a lot of money every year, but in the past few years, the stock price has been declining, which shows how much money the company has made and how much dividends it pays has nothing to do with its stock price. 

If only based on size, popularity, balance sheet health, dividend payment rate, profit growth rate, etc., the so-called company value measurement is only used as an indicator of whether the company's stock should be purchased. Think that the higher these dividends, the better, or the fundamentals seem to be correct.

I want to buy the company's stock and hold it for a long time, imagine I am a Buffett shareholder "I am a value investor". 

Why is the stock price rising? Not because the value of that company has increased, because many people feel that the value of this company, as long as more people think that this company is valuable, then the future value will rise, thus driving everyone to buy the company's stock, long The number of people who buy in time exceeds the number of people who buy for a long time, so the key is the company's sense of value, not the value of that company. Wall Street has such a story. 

Two merchants traded a can of sardines. Each party traded at a higher price and bought the can of sardines from the other party. After many transactions, both parties made a lot of money. One day, a trader decided to open this canned food because he wanted to understand why the high price of this canned sardine can be sold in such a place. 

After opening the result, the trader found out that the canned sardine was stinky, so he accused another trader who said he "sells fakes". The other party replied, "Who told you to open it? This sardine is for trading, not for being eaten."

So please keep in mind that you are not trading this company, you are only trading the papers issued by the company. Today’s paper is worth $10, and tomorrow’s face value is only $1. It will not affect the company's operation at all. The company's big boss and management can still get generous compensation and dividends. 

Even if they make money, they have the right to decide whether to pay dividends to shareholders, but as a minority shareholder, you have no right to intervene in any decision of the company, because you just bought a piece of paper, no matter what dividend stock, public stock or real estate trust, All you buy is a piece of paper, not its actual assets, or to acquire ownership of its assets.

Because in case this company goes bankrupt, the creditors first get the proceeds from the sale of assets, not you as a minority shareholder. So if you are the first two people in me, buying company stock to collect interest or allocating assets, you are betting on two things.

 First, the price of this paper will rise later. Secondly, the company’s management decision-makers will be friendly to you in the future, regardless of whether the company makes money or not, it is willing to pay you a dividend, so a good company will never mean a good stock, the company’s value and the company’s stock price are completely Detachable.

What is a good stock? To put it simply, stocks with rising prices are good stocks for the buyer of holding costs, and stocks with falling prices are bad stocks. So my advice to everyone is that investing in stocks must follow the economic cycle. No matter you buy interest or asset allocation, I still think this company is valuable, and you must buy stocks in the correct cycle. 

And completely withdraw from the market in an unfavorable economic cycle. Because you never know where the price of this paper will fall, or how many years it will take to return to your purchase price.