If there is one thing to take away from all this blog, it is to find value. And nothing can be more valuable than a company that earns. Thus, value is equal to earnings.
I didn't say potential earnings. But just earnings. Many people would buy a company because of its earning potential. A potential merger, a potential acquisition, a potential mineral resource on the earth yet to be mined. But the future is unknown. It is all just "potential". I can not count potential as a net worth. Or use "potential" to buy myself a house, a car or another company.
It is very risky to bet on something that hasn't happened yet. As well as bet on something based on the past. For me, it is a lot more accurate to bet on something as it stands, the present condition of the company.
What is a more accurate indicator of a company's standing? It is the balance sheet. In it, you'll be able to see how much debt it has, how much cash reserves and assets it has. Is it in the red? Or is it flourishing? Did it invest on itself? Did it bought back its shares from the public? Are the debts being paid back?
Now to look at its value, we look at the income statement. How much money is it earning? Is it growing? Is it declining? Is it losing to competition?
Once you have found a good company, one that is in good standing and has good value, you may decide to invest on it (buy its shares). But keep in mind that the market, at the time you saw this share, may not be accurately pricing the stock. How then you'll be able to know if its underpriced or overpriced? Even if you found a good company, paying for an overpriced stock will still make you lose money.
One indicator out of many is the use of P/E ratio. It is not the only way, but one way out of many. A single digit P/E ratio may be a good indicator that it is underpriced. While the higher number means its overpriced.
One way to think of P/E ratio is to look at it in a number of years to earn back your investment. If the P/E ratio of the company is 10 (for example), then it will take you 10 years to earn back your investment.
Once you have bought a company in which you think has a good standing, good value and good price, there is one more thing that you need to be successful. And it doesn't take any technical skills to achieve, yet it is the hardest.
The market on the short term is a voting machine. Market participants who buy and sell shares will do so according to their personal beliefs on the companies' prospects. In other words, a bad rumor may put the stock price diving down, even if the balance sheet is still good. In the same way as a good "potential" news will keep the stock price rising, even though its fundamentals are deteriorating.
The skill then for the investor is temperament. The confidence to hold on to ones' investment and sit through its rough times as the market votes for it in the short term. In the long term, the market becomes a weighing scale. Where the votes of traders and short term fanatics will not be reflected. But the same criteria you based in choosing the company.
In the long term, news and rumors and potentials are not the basis, but standing, value and price. It may take you 2 years, 3 years or even 10 years of waiting for the market to realize this. But the rewards will be great.
Merry Christmas!
No comments:
Post a Comment