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Lessons Learned


On a day when the TSX climbed to record highs, the darling of the Canada’s stock market, Shopify, took a beating; going down more than 8% despite reporting increased revenues. So who saw that coming? That goes to show that trying to pick winners in the stock market is anyone’s guess. Trying to time the market, especially with quarterly profit reports, is a dangerous game of roulette. I can’t even call these market timers “investors” because it’s a pure speculative play knowing that the markets will swing up and down after earnings release. This is called gambling not investing.

The reason I’ve preached index investing over picking individual stocks is for this sole reason. Who really wants to wake up in the morning and realized they lost almost 10% of their money? Wild swings like this rarely happen when you’re investing in index funds. This type of volatility only exists for those that gamble on individual stocks. For many people that are emotionally attached to their money, this is the kind of stock buying that is not for you. Stay away please!

Blaming Someone Else

Not-meWith such a large fall in the price of the stock there’s no doubt many people will start calling out stock manipulation as the main culprit. Lo and behold we got a story today for that too. Is there really a conspiracy by fund managers to short sell the stock? Before we get too far into conspiracy theory talk, do we really truly understand what’s under the financials of Shopify? Do buyers of the stock even understand how the business works or even what it does? Perhaps that is the true issue with buying stocks that are flying high. We don’t even understand them.

Do You Even Know?

Before people go on saying that Shopify is a great company let’s just understand one thing. They don’t make money. Ever. Since the company’s public inception over a year ago, Shopify, has never turned a profit on its operation. Yes, revenue has gone up, but so has costs. This doesn’t mean Shopify is a poor business, but one has to recognize that when you are investing in a company so young as Shopify, you are truly speculating on the growth potential and not the profit it generates. This makes investing in growth companies a lot more riskier than say a large conglomerate like Johnson & Johnson. Unfortunately for many investors that buy into Shopify, they don’t understand this. In fact, they probably didn’t know it was losing money and bought because of its name or some water cooler talk from a colleague.

On top of the risk of owning the stock, do people even know what Shopify does? Most probably don’t even know how a company like Shopify even makes money. If you don’t even understand the business model of the company you are investing in, then this makes for a bad investment. How do you know when the company is even doing well? Who are the competitors? If you are willing to put a large amount of money into a stock, you sure as heck should know the business in and out. The negative news about the company fall on its marketing practices rather than it’s business model. Are investors even aware of this or are they just falling for the conspiracy theory of Canadian news outlets out to get more clicks for their articles? Proper research is the best remedy to ignorance.

Lastly, this is not a time to panic. If you’ve been a long time investor of Shopify, you’d probably respond to my post and say I’m just hating. That’s because any long term investor in Shopify has made an absolute killing on the stock. Let’s not forget that at it’s peak this year, Shopify had climbed over 150% from the previous year. Even with the 10% drop, the stock is still poised to gain over 100% for the year. That’s nothing to be crying about. The performance of the stock has been exceptional and it’s not uncommon for a bit of a correction to stop the speculation from getting overheated. Investors should really be paying attention to the growth of the stock to ensure that its valuation still holds true. Is Shopify really growing revenue at a rapid pace? When will it actually become profitable? Is the market still growing for their services? These are the questions an investor should be seeking to answer. Not, what will the price of my stock be next year.

Stay Informed Or Stay Away

I’ve said it many times, if you’re not willing to learn about a company and it’s financials, then it’s not worth investing in. A regular person is much better off investing in index funds where a basket of stocks are held and you’re just betting on humanity and the economy as a whole to improve over time. If you have no time or interest in getting to learn about companies and financial analysis, then stay away from buying individual stocks. It’s just not right for you.

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