What’s the Difference Between Investing and Speculating? (Part 2)

May 12 / Cayden Chang

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Earlier, I mentioned that when a company makes money, the share price usually goes up. But there are exceptions. Sometimes, even when a company releases good news and makes more profit, the share price still drops. Let me walk you through these exceptions, because I want to make sure we cover all angles.

So here’s the strange part — a company reports positive earnings, and yet people still sell the stock. And when most people sell, what happens to the share price? It goes down. Always remember this: the only reason a share price drops is because most people are selling. It’s not always logical or scientific — human behavior can be irrational.

Let me illustrate this for you: the company’s intrinsic value keeps increasing as it earns more money, but the share price keeps falling. So here’s a quick recap: even if the share price goes down, the intrinsic value does not. And when the share price is lower, the risk is lower and the potential return is higher.

I’ll show you a real example — a stock I’ve bought and shared about previously. At the time, it was trading at $1.40. Then it dropped to $1.20… then to $1.00… then $0.90… and at its lowest, it was $0.95. But throughout that time, the company was actually growing in value.


Let’s go back to our ViA (Value Investing Academy) calculator. You remember how we use EPS (Earnings Per Share) to calculate intrinsic value, right? Let’s take a look at this company’s financial report — you tell me if it’s becoming more valuable or less.

(ViA calculator is available for graduates and students of the Value Investing Programme. To find out more, join our Value Investing Masterclass)


This is a comparison between Q3 2017 and Q3 2018 — quarter to quarter. The net profit increased by 85%. It’s like your salary getting an 85% raise — how would that feel? The profit margin increased from 26.8% to 32.7%, and EPS increased significantly as well — meaning intrinsic value went up.

Then they compared the first three quarters of 2017 with the first three quarters of 2018. Profit rose by 154%, gross margin improved from 26% to 34%, and EPS jumped by 148%. So based on all this data, is the company’s value going up or down?

Clearly, the company’s value is increasing, even though the share price was dropping.

Now, here’s the million-dollar question: What’s the opportunity?


Most people only look at the price, not the value. They see the price dropping and panic. But as a value investor, you see both — the falling share price and the rising value. That’s your edge.

This is the ideal scenario in the stock market — the company’s value keeps rising, while the price keeps falling. Why? Because speculators and gamblers don’t understand value. They only react to headlines or follow the crowd.

Eventually, when the company keeps releasing strong results, the speculators start to take notice. They hear good news again and again, and they think, “Eh? Something’s going on.” Then their friends start buying, their barber buys, their uncle buys… and finally, they jump in.


And when enough of them jump in, what happens to the share price? It goes up. So those who know something are always ahead. Those who know nothing will always follow. That’s why it’s so important to be the first group — to know something.

Now, some people think education is expensive. But remember this: my average purchase price for that stock was around $1.19. Today, it’s $1.30. You are not right or wrong because others agree with you — you are right because your data and reasoning are right.

So when the share price falls, I ask myself, “Is my reasoning still valid?” If it is, I continue to buy more. Without data analysis, you won’t have the courage to act when the market goes against you.

Before investing, you must realistically assess your probability of being right — and how you’ll react if you’re wrong. And that’s why we always include a margin of safety.

Now, let’s flip the situation: what kind of company consistently loses money yet sees the share price go up?

Yes — Tesla.

Tesla was losing money quarter after quarter, and yet the share price kept soaring. In fact, its EPS was negative. Their financials looked like a swimming pool — drowning!

Their operating cash flow? Mostly negative, only one year positive. ROA? Negative. ROE? Negative. Debt? Increasing. So how could this be considered a good company?

So, what exactly are people betting on?

They're betting on the founder — Elon Musk. Maybe they believe one day he’ll send humans to Mars. That’s their bet.

Now, this is just my personal view: Elon Musk is brilliant at selling dreams. He’s incredibly gifted at painting visions and making people believe they’ll come true. And that’s what he’s truly good at — selling dreams. And whenever people buy into dreams, the share price goes up.

But remember, we are value investors. We don’t buy dreams.

We buy the value of the business.

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