Many people monitor the Stock prices of those stock that they have brought everyday...
Why? They are buying into the Stock Market... which mean that they buy stock based on hot tips, CNN expert opinion, their friends comments etc etc... However, Mr Market is not so predictable. He can has mood swing very fast.... Sometime he can behave like a BULL.. sometime he will behave like a BEAR... other time, he is neither here or there.....
Buying into the Stock Market in this way is know as Speculation, not investing....
To invest is to study and understand the company fundamentals and buy the company stock at the right price. Let me illustrate slightly more....
- Do your homework to read the financial report of the companies of the past few years. Work out the ROE or ROIC, ROA, Net return, Free Cashflow in comparation to Sales etc etc.. to make sure that the company will have a higher possibility of growing in the future.
- Check and determine if the company has wide economic moat.
- Check the Financial health of the Company... just like what we do in our regular checkup at the clinic. Look for the Interest coverage ration, quick ratio, current ratio, debt to Equity ratio.
- Walk to the street to find out how the company is preforming. Eg. If consumer business...check out if Merchants are keen on stocking up the products from the company that you are thinking of buying.
- Read the released articles of the company from the press, or from the company directors to find if there are any abnormalities.
- Understand the company business... if you cannot understand it, don't buy. For example, if the company is in Pharmaceutical business... then it can have very good financial report for the last 5 years but it will lost patent protection on one of it major product that has generate more than 50% sales for them last couple of years... then beware.
- Calculate the Intrinic value of the company and factor in a margin of safety based on inflation rate, the risk in the industry and your own safety net.
- Buy when the Market valuation of the company is lower than your calculated Intrinic Value. In this way, with the Intrinic value on hand, you will have the confidence to buy more of the company stock even when it continue to rise but is below your calculated intrinic value.
- Sell when any of the investment criteria is broken or when the maket valuation of the stock is many times more than the intrinic value or that you need the money to invest in more profitable investment.
Most people enter into the market to buy stock when it is rising and nearing it peak driven by GREED. When the stock drop drastically in value, they start to PANIC. They will hold on to the stock and praying for better tomorrow. They will wait and wait... until when the stock is nearing to start picking up again, then they Sell. In summary, it is buy high and sell low situation... sigh!
To avoid it, i would suggest that you try out this e-course to improve your education in stock picking. In addition, upgrade yourself by reading book on value and grow investing.
....... Hope to hear of your comment.. i also need to learn from you.
Quote of the day: Only when the tide is down, then we know who are swimming nake.
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