Last Updated on April 30, 2025 by stlplace
Below was written in 2008
What is speculation
A stock creates its value by
1) dividend;
2) stock buy back;
3) investing in business, and make much more money compared to the money being poured in.
If it does not fit in the 3 criteria above, we expect the stock price to go up to make a profit.
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One common mistake new investor (like yours truely, after 4+ years investing in US market) is mistaking cheap with value. Let me explain it by example.
In early 2004 Nokia stock hit a rough patch because it did not offer a flip phone in the US market, and thus losing market share to rivals (Samsung, Moto). The stock first dropped from $22.xx to $17.xx, being a bargain hunter, I bought some shares: thinking $20% discount is a good opportunity. Ten days later, in its conference call, the company lowered the outlook for next Q, the stock dropped to $14.xx. Undefied by the market, I went ahead and added more, only to see the stock dropped as low as $10.xx before recovering, by that time I was all out with a loss.
This is also a lesson of “catch falling knife”. Generally, when a company stock falls, the stock fell and LFT is a good example.