Before buying a stock....

[Hollyshiit]

The forum is for anyone who has no idea,still learning or have a some basic knowledge of the stock market and or stock picking but still feel like improvement is need. (whether it is day trades, short-term swings or long term investments)

So, before you make a purchase of any equity, what kind of thinking process or valuations goes into ur mind and justify that this company is a buy candidate ??

Whether it is a specific set of rules,valuations, price targets, quantitative and qualitative factors or even technicals? also, do you have an exit strategy in mind n how do you determine ur buy sell price?

pls share with the rest of us so we can gain knowledge and hopefully have an edge on the smart money.


Cheers!

[tacobell]

I can give you a 300 page answer with hundreds of different points, but in the end it's all about knowing the market.

Before you really get into it, perform your own risk assessment on yourself, determine how much you can play with, are you in this for short or long term gain?

Research the company - look at operating history, profit margins

research the competition - is there room for growth?

research the market - share price performing under or over expectations


It's pretty simple for me, buy a stock you are comfortable with, hypothetically a stock you would keep for many years.

[Hollyshiit]

^
ok, lets be specific.

you must do valuations before buying into these companies? I mean if you buying into a company, you must think it is under value / attractive to you at its current selling price, or else u would be speculating right?? Which method of valuation do you mostly use to determine the intrinsic value of the company ur buying and ur margin of safey?

Do you use Discounted cash flow, net asset valuation or earnings power valuation more often? or any others that i have missed?

and as you stated above, buying a company that you can hold for many years.. but you see, we are not Warren, 1.Its hard for us to determine if the company of choice can keep up its durable competitive advantage. What method do you use to determine if the company of choice sells product or services that can sustaine its earnings growth and competitve advantage

2. most companies with that sustainable competative advantage are already over-priced. trading in between 20-30x price/earning and like 3 times BV with top n bottom line growth of only 8-12 % annually ,

how do you know ur not over paying for the future growth of these companies??

[97ITR]

I traditionally follow a value investing-esque approach

1) Screen for companies with low p/e, low price/bv, not trading near 52 week high, strong management, management has "skin in the game", no unions, ability for divestures

2) calculate NAV and EPV to find entry and exit prices (taking into account what you feel will be the probability of unlocking overlooked value) with a margin of safety of 30%

I tend to favor companies with a business model that's easy to understand. Also make sure it can generate positive cash flow. Nothing kills good businesses more often then inability to cover interest.

[wouwou]

read the web articles
do the chart work
???
profit!

[tiger_handheld]

investopedia is your friend: http://www.investopedia.com/university/stocks/

after reading - they have a simulator you can try on. if you make mad cash on teh simulator , sign up for a investing account.

[Chuck Norris]

Probably an infinite amount of answers to this question.

There is ironically no specific right or wrong, just some guides that may or may not work depending on your temperament, objectives, time horizon, market conditions, etc.

In terms of some tried and true formulas, look at companies with PE ratios that make sense, plan on buying a company that you can understand and see long term value higher than the current rates.

This is typical for long term investing however you want to know where the overall market is to make sure you're not buying in a heated market.

It's so much work that people, including myself, spend their life involved with the industry and still never have an exact answer. Have fun!

[Hollyshiit]

thanks for the feed back guys..

As for myself, I tend to follow the value approach. It usually takes me a only few mins of analysis of the financial statements, (Balance sheet and Cashflow first then the income statement after) before making my decision if i should proceed with and dig further with this company.

IF it is a company of interest

i tend to look over the B.S. Whether the company is debt burden. If the current working capital can cover its short term debt. ie. if the company has an abrupt down turn in earnings, will it be able to survive. Then i would derive in to its historical data, to compare its ratio. For example, totalling the 5 years avg p/e p/b, p/s, peg , asset turn, inventory turn, AR ratio
etc and see how the company is performing in regards to its current status. i would then ask myself, if the company is selling below its avg ratios.

I would then run a what is called common size balance sheet approvach . meaning listing all of the asset and liablity in components in percentage and compare it to its competitors. this method gives me a bird's eye view of how the companies uses its asset and liabitities to generate income compare to its competitors and its total enterprising value in precentage

The next step would be running an analysis on the cashflow statment. I would ask myself if the company in question is generating positive cash flow. Does it generate enough cash flow to cover its future expansion. What is the return on asset ratio, return on shareholders equity. Is the management allocating its capital efficently? how is it allocating its capital ?? what is the precentage?? compare to its competitors. has this percentage been growing or at least staying stagnant. Has the top line and bottom line been growing? (actually this belong in the income statement but whatever) Is the company in question using debt to finance its operations. has the company been issuing shares? what is the avg public offering a year, how is the stock options compensation struture like?? compare to its competitors??

Finally would be the income statement. I usually would run a common size income statment approach as stated above. i would then ask myself, what is it gross margin compare to cogs. how much is it spending staff and administration. what is the precentage of net income compare to its rev. has he company been trying to trim of its fat to stay lean. etc


finally, i would run a few valuations for example, dcf (if the company sells product that is preditable.) run a valuation call nav ( it require tweeking on the b.s and thinking if another competitor is to enter this line of business, how much ultimatly would it need to spend to run the operation same as the company im looking over) Epv, which is a way of valuing a companies avg 5-7 years of earning without looking into growth factor to see how much the company is worth, Also, some basic mutiples valuations for example multiples compare to its pe, bv etc.

After which i would get a pretty good idea of whether this company is actually selling below what is worth, using some TA to look for an entry

haha i could go on and on about this but this is the skin of it. hopefully, this approach can generate me some good rewards for the long term. it usually takes me about 4-5 hours to run an analysis on the companies.

companies that i find quit interesting at the moment. mov,csr, uta,wh

feel free to look into it and give me some feed backs

pls correct me and feel free to put in any inputs on my train of thoughts on analysis on companies. hope this can help some of the people who are looking in growing their wealth in the stock market.

Remember, as Warren stated. " I wouild rather be approximatly right then precisely wrong"

Cheers

Hollyshiit

[Scudz]

Am I one of the few that avoid value trading? I never did do well with it since no one seems to have a 'right' answer. I've gone to school for Finance. I've looked at balance sheets, cash flow statements, etc. I've taken accounting courses and read books and books on value investing. However, in the end, I still lack the tools to do well in value investing. Namely, I know shit about running a company, let alone trying to compete against Wallstreet's best and brightest with access to more tools than a simple Yahoo Finance researching will do.

So I looked to day trading and never looked back!

Now, I spend no more than 5 mins before deciding whether to enter a trade or not. Usually a lot less as I only keep track of only 4-5 possible trades. (For those who'd like to know, they're the Forex pairs GBP/USD, GBP/JPY, EUR/USD, EUR/JPY, CAD/JPY)

Because these pairs are active pretty much 24/7, I look to trading higher timeframes. What I mean is that I open up a chart, identify support and resistance levels and look where the price is currently at. Timeframes in the 1hr, 4hr and daily provide me with almost all the information I need.

The last part is certain japanese candle formations at certain areas. Namely S/R areas and 50&00 psychological areas. I do away with all the fancy indicators (including any oscillators, trend lines and volume analysis. Though granted, volume analysis is very useful to a centralized market, but Forex markets has no such thing).

I usually go through each pair in less than 30 seconds and know what I'd like to see and what I expect. If I see a possible trade, I will wait and see what the price does. If it meets my criteria, I calculate my risk (usually at 2% or less) and enter in the trade with a take profit in mind.

I definitely like swing trading A LOT more than value trading. Why? Saves time, allows me to understand why the markets move the way it moves during smaller intervals and affords me time to do other things.



PS. Did anyone notice that when the USD/CAD broke the psychological support barrier of the 1.0230 and dipped very close to par? It tried 2 other previous times to break it but failed. Before back in Jan 2008, it had trouble break the SAME area but back then, it was a resistant ceiling at the time. Keep an eye around this area still. As of 12:43pm GMT (3:43AM PDT), it's above the resistance but hasn't closed yet. I suspect it'll start going down and bounce around this area and hit the $0.97CDN/1USD pretty soon.

[Chuck Norris]

Originally Posted by Scudz

Am I one of the few that avoid value trading? I never did do well with it since no one seems to have a 'right' answer. I've gone to school for Finance. I've looked at balance sheets, cash flow statements, etc. I've taken accounting courses and read books and books on value investing. However, in the end, I still lack the tools to do well in value investing. Namely, I know shit about running a company, let alone trying to compete against Wallstreet's best and brightest with access to more tools than a simple Yahoo Finance researching will do.

So I looked to day trading and never looked back!

Now, I spend no more than 5 mins before deciding whether to enter a trade or not. Usually a lot less as I only keep track of only 4-5 possible trades. (For those who'd like to know, they're the Forex pairs GBP/USD, GBP/JPY, EUR/USD, EUR/JPY, CAD/JPY)

Because these pairs are active pretty much 24/7, I look to trading higher timeframes. What I mean is that I open up a chart, identify support and resistance levels and look where the price is currently at. Timeframes in the 1hr, 4hr and daily provide me with almost all the information I need.

The last part is certain japanese candle formations at certain areas. Namely S/R areas and 50&00 psychological areas. I do away with all the fancy indicators (including any oscillators, trend lines and volume analysis. Though granted, volume analysis is very useful to a centralized market, but Forex markets has no such thing).

I usually go through each pair in less than 30 seconds and know what I'd like to see and what I expect. If I see a possible trade, I will wait and see what the price does. If it meets my criteria, I calculate my risk (usually at 2% or less) and enter in the trade with a take profit in mind.

I definitely like swing trading A LOT more than value trading. Why? Saves time, allows me to understand why the markets move the way it moves during smaller intervals and affords me time to do other things.



PS. Did anyone notice that when the USD/CAD broke the psychological support barrier of the 1.0230 and dipped very close to par? It tried 2 other previous times to break it but failed. Before back in Jan 2008, it had trouble break the SAME area but back then, it was a resistant ceiling at the time. Keep an eye around this area still. As of 12:43pm GMT (3:43AM PDT), it's above the resistance but hasn't closed yet. I suspect it'll start going down and bounce around this area and hit the $0.97CDN/1USD pretty soon.

As you know Scudz, I spent over 2 years with excellent results ignoring just about everything every book says. While this works well for short term trades based on the psychological element of the market, I don't know if I would have the same advice for someone looking for investment advice.

It really comes down to your time horizon and your temperament. The things you're talking about are pivots, market movement based on volume specifics, and trends. While I'm the first to agree these are essential in timing markets, it depends on how long you plan on being in the market itself (time horizon).

Plus there is a greater level of risk. Not everyone wants to spend the time we've spent learning the ropes before jumping in. In fact, I would say there is probably one in ten thousand that spend as much time as we do to learn the markets. It's a life long journey with lots of ups and downs and it's not for everyone.

I hate to use poker as an example but how many people are pro poker players that survive?

[Scudz]

Originally Posted by Chuck Norris

As you know Scudz, I spent over 2 years with excellent results ignoring just about everything every book says. While this works well for short term trades based on the psychological element of the market, I don't know if I would have the same advice for someone looking for investment advice.

It really comes down to your time horizon and your temperament. The things you're talking about are pivots, market movement based on volume specifics, and trends. While I'm the first to agree these are essential in timing markets, it depends on how long you plan on being in the market itself (time horizon).

Plus there is a greater level of risk. Not everyone wants to spend the time we've spent learning the ropes before jumping in. In fact, I would say there is probably one in ten thousand that spend as much time as we do to learn the markets. It's a life long journey with lots of ups and downs and it's not for everyone.

I hate to use poker as an example but how many people are pro poker players that survive?

You're absolutely right. But then again, didn't many of us go to post-secondary school of some sort to earn a higher pay as well? I suppose not everyone wants to spend time learning, but they definitely should! The tuition can be so much cheaper and the rewards...

I equate to spending time looking and researching the same amount of time learning and practicing trades. Otherwise, if people didn't want to spend time, they'd hire someone to do it.

Also with your respect in risk, I've see many, if not the majority of investors willing to hold onto a losing trade and losing more than 50% of their investment. So I too, see the risk part being pretty much on equal as well.

Now granted, there are those who do well in value investing. The Stock Market thread is an testament to this with fellow RS members doing well. In fact, I used to look for TERRIBLE financial statements and hunt for companies that have a quick rise in their stock price and would short the hell out of it for quick profits. Not always easy, but the odds are definitely in your favor. Sometimes it's so easy it becomes hard to jump in because EVERYONE sees it.

Lastly, I find it funny that I too liken trading/investing like poker. There's skill, there's luck and if you're good, you can live off of it.