Finding shares to invest.

Hi there,

In this series of posts, I’m starting the topic of valuing shares, a very subjective topic.

There are many procedures commonly used by investment analysts to estimate the price at which a stock can be purchased.

Values can be ascertained based on assets that the company holds or the cash flow it’s expected to generate. Values can also be ascertained by comparing certain ratios like P/E to similar shares in the market.

Some methods are not for all- they are complicated and require expert knowledge in finance and accounts. Some are relatively easy, within the reach of everyone.

The absolute value obtained by different methods would be different but all results will fall within a price range. So, what’s more important is to stick to any one  valuation method you are comfortable with, and  keep trying on it until you really become an expert in it. All valuation methods have its plus and minus. No one valuation method is perfect in all aspects. What’s important is to get to that  price range which informed investors would prefer.

In any case, the first step is to short list a set of companies worthy for analysis. You cannot value all the 7000 plus stocks listed in the stock exchange and then decide which stock to buy and at what price.

So, from practical point of view, some smart moves are required to spot a stock worthy for further analysis. How can you use the resources around you to find companies worth investigating further? That’s the first question I’ll try to answer.

The second question is- what’s the general nature of the stock selected? Does it exhibit growth every year?  Is it a consistently dividend paying company? Or is it a company that pays increasing dividends? Or is it a company that pays no dividends at all? You should get the clues from historical data.

The final question to be answered is – What’s the reasonable price at which you can buy that particular stock?

The answer is- there are no hard and fast rules or formulas for finding the ‘correct price’ to buy stocks.  In fact, there is no correct price at all. What these methods would reveal is a ‘price range’ which you can consider. Whether you enter at the high or low end of the price range is a matter of holding on to your nerves.

Different tools and indicators exist which can be used to form your own opinion about the quality of the stock, the reasonable price at which it can be bought, the risk of buying at that level and the expected returns for taking the risk.

In the articles to follow, what I would attempt is to bring together some scattered  ideas – some practical tips, some theories and principles which you can use to spot good stocks, make investing decisions and thereby increase your odds of success.

GETTING THINGS RIGHT.

In my opinion, the key to successful investing is to buy a great stock, at a reasonable price, at the right time from the right sector- not by relying on a single factor like P/E, but by considering all the available factors.  These include –

  • Historical performance
  • Fundamental analysis
  • Qualitative aspects, future prospects
  • Reasonable future estimates.
  • Expected risk & Risk premium
  • (is there anything left? )

Yeah, it’s solid research I’m talking about. It’s your hard earned money. You just have to do all the hard work before investing that money. More you work, more you are likely to end up making money. The more reckless you go, more money-less you become.

After stitching together all the factors, you should be able to fix a price range for the stock. Once the price range is fixed, investment decisions are made by comparing it with the market price of the stock.

till my next post ..

Bye..

End note: some readers have confusion between ‘valuation of shares’ and ‘value investing’.  ‘Valuation of shares’ is an attempt to find what the stock is worth. ‘Value investing’ is a strategy of investing below the book value. The process of Valuation may result in finding value shares, growth shares etc..

You may like these posts:

  1. Should you invest or trade in stocks?
  2. Stock investing strategy- GARP
  3. How much money should you invest in stock markets?

2 Responses to “Finding shares to invest.”

Lins

January 9, 2012 at 12:08 pm

Hi Victor
You can crunch numbers. How do you measure management? I mean what is there in their minds today.

J Victor

January 9, 2012 at 4:23 pm

nice question..

Any data you get, even if it’s yesterday’s , it’s still past data.

By reading the return on assets, return on investment and return on equity figures you can check the performance of the management. These ratios shows how effectively the people on board has utilised the assets available with the company.

The only way to guess what’s going on now is to keep updated about the company, it’s projects, listen to interview sessions with the management..you might just get the clues by reading between the lines..

Thorough knowledge of the business they’re into, the effects of any proposed regulations that affect the industry etc can also give you clues about how the management might react to circumstances.

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