You need to invest but you don’t need to be a genius to do it smartly.
- more people own stocks today than at any point in the past
Value Investing is long-term investing in undervalued stock. The author also recommends investing in index’ to diversify the portfolio.
Think like a banker → assess what the stock is worth.
- Intrinsic value — what is it worth
- Margin of safety — don’t lose money
This is what rational investors do. They sit back and wait for the market to offer stocks for less than they are worth and to buy the same stocks back for more than they are worth.
Buy Stocks like Steaks… On Sale
The time to buy stock is when it’s low in price.
Buy stocks at a low multitude of their earnings.
Tips
Debt → company should own 2x of what it owes
Cycles → industries / companies are more/less dependent on the economy (ie food is not dependent)
Competition → only if there is a clear advantage
Fraud → if you don’t understand their financial statement, don’t buy
Currencies → don’t speculate on currencies, hedge them
Stay within your own circle of competence.
Balance Sheet — shows the companies’ stamina
- Liquidity
current ratio = current assets / current liabilities → should be 2x
quick ratio = as above just excludes inventory
- Working capital = current assets — current liabilities → the more the better
- Trends — observe them over last 5 years — liabilities, debt, assets, etc
- Debt to Equity Ratio — how much debt is in the company?
Income Statement — what can the business earn?
- Revenue over time by department / product
- COGS
- Profit Margin
- OpEx over Revenue
- EBITDA
- Earnings per Share (EPS) = Net profits / Number of shares outstanding
- Diluted EPS = if all convertible instruments convert into stock
- Return on Capital (ROC) = Annual earnings / Capital at start
Questions to Consider
- Pricing — outlook? raise?
- Sell — possible to sell more? would increase gross profit?
- Gross profit margin as sales increase?
- Can it control expenses?
- Can sales be grown at no additional cost?
- Profitable — as it’s competitors
- Growth — how will it grow?
- Cash — what will it do with the cash?
- Competitors — what are they doing?
- Financial — how does it compare with other companies’ doing the same
- Worth — how much would it be worth if you sold?
First rule of investing: Don’t lose money.
Second rule of investing: Refer to rule number one.
Leave yourself a cushion in case you made a mistake
Companies with debt → less appealing with less debt as they can survive tough times better
Diversification → both in terms of stock you own and industry they are in (ie invest globally)
Stock
- Bloomberg
- Yahoo!Finance
- Zacks.com
- MSN
You can even check who else owns the stock.
Funds
- Morningstar
Buy when insiders buy — they have many reasons to sell their stock, but only one reason to buy it → in the US insiders have to announce that they are buying 2 days in advance
It’s time in the market, not market timing, that counts.
Don’t check prices every day → you’re investing in the long term.
