Buy what you know, and stick to companies with good long-term prospects and quality management– are 3 well-known rules that the famous investor, Warren Buffett, follow when buying stocks.
None of these rules I followed when I bought 200 shares of SNAP when it went public last week.
The purchase was done on impulse. A risky move indeed, but it is a risk that I can afford to take.
I bought what I barely knew
I sort of knew what SNAP is. It is the parent company of Snapchat– famous for its disappearing messages. Across the country, millions of teenagers and millennials have been using the app to share intimate and sometimes indecent selfies. It’s the killer app that could have saved Anthony Weiner’s career– if only he knew about it.
I’m no active Snapchat user, but I do try to login to my account (I go by the username of M Solve) every now and then. The only reason why I have yet to send a message is that I don’t know anyone there. Most of my friends are either on Facebook or Instagram.
Being an older Generation X’er, I simply don’t belong to the age group (I still do get a lot of compliments that I look very young for my age though).
What’s interesting for me is that the company’s 26-year-old co-founder and the CTO, Bobby Murphy, is part Filipino. He’s now worth a cool $5.6 billion dollars. His mother grew up in the Philippines before emigrating to the USA. This is probably what intrigued my interest to watch the stock.
Valuation, what valuation?
Everybody knows that buying stocks is the same as buying a piece of a business. When you’re buying the coffee shop across the street, the first thing that you ask is “What’s the bottom line?”. Let’s say the store’s net profit is $10,000 per year after all the employee salaries and other expenses are paid. If the owner is selling the business at $100,000, the Price-Earnings (or the P/E ratio) is 10.
The P/E ratio is probably the most important metric that professionals use (and misuse) when buying or selling stocks. In general, a low P/E can indicate that the company may currently be undervalued. Either that or the company is doing very well relative to its past trends.
In the case of Snap, there is no P/E ratio…
Companies that are losing money do not have a P/E ratio.
In fact, the company has incurred a net loss of $514.6 million in 2016 and $306.6 million in 2015, according to its SEC filing in February.
An alternative would be to use the Price-Sales metric by using revenues instead of earnings. But even then, valuation in Snap’s case is not relevant, according to the “Mad Money” host, Jim Cramer. You simply cannot value the stock when only 200 million out of the 1.2 billion shares are publicly traded.
What’s pushing the price is the stock’s “hotness” factor.
Why then did I buy the stock?
It’s pure speculation, I do not plan to hold the stock for a long time.
I seldom buy individual stocks, it’s risky. The ones that I’m currently holding, I’ve held for a very long time. I’m fortunate that I’ve profited from them, through dividends and asset appreciation.
Snap will be the exception to the rule. For growth stocks like Snap, expect potential dividend money to be reinvested back to the business. Capital appreciation is what I’m hoping to get.
You see, there’s nothing wrong with doing a little speculation 😉
I bought the stock with money that I can afford to lose.
$5,000 is money that I can afford to lose. That’s the most that I could lose, but the probability that I’d lose all that in a year or two is close to nil.
I figured that if the stock loses 2/3 of its value then that will be comparable to me spending $3,348 to travel to Manila to attend my high school reunion. And since I didn’t actually go, any loss that I might incur due to this trade will still be within my budget.
Let’s wait and see.