History has it that Benjamin Graham and Warren Buffett are role models as far as value investing in stocks is concerned. These two accumulated so much wealth that Warren Buffett, even today is one of the richest man in the world.
However it is not easy to emulate these two great investors, but there is a slightly easier way to hand pick a few stocks to do value investing which is defined in the course how to invest well to retire rich. Those details cannot be shared here. However this article will help those who have done my course more.
Here are some of the important things to before investing in a stock for the long term:
Buffett’s Investing principles of investment:
Note: These Investing principles will look very easy, but the fact is they are not.
Intrinsic Value of the Stock Is Very Important:
Intrinsic value of a stock is its current price compared to the company’s future earnings power. This is very difficult to assume. And for those who believe in back testing when they want to test any option strategy here is where all their back testing will fail.
This is the reason never believe in back-testing. It is just what may have happened in the past but it is not guaranteed to happen in future. There is no dearth of many strategies that have performed very well in back testing, but failed in actual live trading. People still believe in back testing for reasons better known to them.
Nifty is not a living thing that it will keep repeating its own history in the future. 2007-08-09 is the best example of back-testing gone bad. Nifty went 50% down and then 50% up within two year.
And then it never happened till now. How in that case is back testing worthwhile?
Back-testers are the ones who look at the past but are unable to look at the future. A far as stock investing is concerned those who look at future only make money.
Past is past – if a stock has given 100% return in 12 months then there is no guarantee it will give the same return in future. Back testing cannot find out the intrinsic value of a stock.
Future earnings can be guessed by how well the company is performing and what are the chances of it doing the same business and keep the pace of its growth in the same rate as last few years.
Obviously this cannot be done in any stock, you need to classify stocks to do that. There is a way to do that written in the how to invest well course.
Once you have selected the stocks to research future valuations gets a bit easier to reach because you research only in good stocks.
Area of business
Like if its morally legal (like food), morally illegal (like gutka, tobacco etc), cultural or modern depending on the current prevailing society, is this business sustainable by future generations etc.
Business Management
Who are the people who are running the business and managing it. Have the decisions they taken in the past benefitted the company or not? Is some kind of fighting going between them etc.
Financial Measures and Value
Some of the Buffett principals were easy to execute but difficult to calculate. For example Economic Value Added (EVA), is difficult to calculate but easy to implement.
Economic Value Added (EVA) is an estimate of a firm’s economic profit in future. EVA is the net profit less the equity cost of the firm’s capital. The idea is that value is created when the return on the firm’s economic capital employed exceeds the cost of that capital.
Please read above the Intrinsic value to some extent is trying to figure out how well is the stock price placed in compare to its future profits.
EVA is hard to know, but once you know its easy to implement. If EVA signs are positive he bought the stock immediately without looking for support resistance etc which most day traders do. If the company’s future is bright it’s stock will definitely rise in future.
Calculation of EVA needs a lot of mathematics and adjustments. Once you get to know how to calculate EVA, it’s easy to take a decision to buy a stock or not.
Small Note: For intraday day traders these things does not matter. All they need is to control emotions and trade. On top of that intraday day traders get a huge margin of over 200% on the capital used therefore they can exit with small profit or loss. However stock investors for the long term need 100% of the capital to be invested. For them the above does matter. For multimillionaires like Buffett it is even more important because they deploy a lot of capital in one stock. They cannot do it without proper research.
Buffett had to foresee the future of a company before investing millions.
As you can see the above is very easy to understand but difficult to find out. Buffett initially did it all alone but later had resources to look into these before investing the money.
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