Weekly Q&A: Investors Ask, Clement Answers #4

This week we got very interesting questions from our investors - they wanted to know the frequency Clement makes changes in his portfolio, how he recommends one learns about the stock market (other than books), and how to value a company before it IPO’s.

How do you value a company pre-IPO?

Great question, especially with Airbnb, Uber, and a few more big companies planning to file for an IPO soon.

First, let me start by saying that investing in an IPO is riskier than in other stocks, because there is often little information available and potential information asymmetry, where some people “in the know” have knowledge that regular investors don’t, which puts regular investors at a disadvantage.

If you still want to venture into IPOs (which is one of my favorite investments), look no further than the S-1 form companies have to file with the SEC prior to issuing shares. You’ll find it by googling “S-1 form ‘company name’”.

This form will tell you almost all you need to know to get an idea of the company’s true valuation - it’s revenue, profits, growth for the past couple of years, major risks affecting the company, and basically all available financial information on the company.

From there, of course, you have to know how to analyze an income statement, a balance sheet, and cash flows. If you are not familiar with these terms, take a moment to read up on them, and maybe practice your fundamental valuation skills before you jump in on the next IPO.

IPOs are a great-but-risky investment. I often find the disparities between the initial valuation in the stock market and the true valuation to be a good way to generate returns.

How often do you make changes in your investment portfolio?

When you invest in the stock market, you need to have a reason for going in, and a reason for going out.

We all have criteria by which we evaluate companies. Some of us look for inexpensive companies, while others look for explosive growth. But we all have an idea of what constitutes a potential investment.

You add positions when you feel you’ve found a new opportunity that fits your standards. Sometimes I can open a bunch in a week, and do absolutely nothing the next week.

The same goes for closing positions. When we open a position, we have an investment thesis. We believe the value will rise, or fall, and we set a price target that we believe reflects the true value of a company. We drop things once they’ve fulfilled their potential, or once we no longer believe our thesis will play out. Again, some weeks are action filled, while others are just spent waiting for Mr.Market to do his thing.

Basically, the frequency in which you add and drop positions depends on the market. You need to take what the market is giving you, and you shouldn’t force an investment.

I will say that on average, the more transactions you make, the more fees will eat into your capital, and the harder it is to make a net profit on your investment, so trade wisely!

I know you recommend books, but how else can I learn about the stock market?

Well, in my book, books are the #1 resource to learn from. They give you all the technical knowledge you need to start exploring the world of investing. Here is my personal list.

Once you’ve acquired the ‘language’ of investing, you can start interacting with other investors. Join a community, meet other investors, and create discussions on Twitter, Quora, or Investing.com. You’ll find there’s still plenty to learn from other people’s experience.

You should also open a brokerage account. You can choose to start with fake money, just to get a handle on how everything works and avoid losing real money as you learn the ropes.

Eventually, to really understand the stock market, you’ll have to open a real account, with real money. Once you do that, you’ll be exposed to the psychological aspect of investing, which is perhaps the hardest one to master.

Take your time, there’s no rush. Investing successfully takes time and dedication, like everything else in life. Mastery of the stock market is extremely hard to achieve, but the road is full of moments worth taking the journey for.

If you have questions of your own you’d like Clement to answer, please leave them in the comments below or send them directly to Clement via Twitter - @ClemThibault.