You’re curious about which stocks to buy for investment. You think to yourself… Can I learn to do this? I’m telling you now, you can. You need a reliable resource and you need to take action.
Here’s a rundown of what I think are the most important things to keep in mind when you’re deciding which stock to invest and I’ll tell you why.
But before we get into the details of what and how, I’d like to remind you. On top of the what and how, there’s being in the right mindset and a commitment to make it happen. Just like anything you learned in life, you’ll go through a journey of learning and being better.
Point Number One: Follow Your Investing Rules
Know that investing is not just throwing your money in a stock and hope it appreciates. Just like anything that requires effort to make something happen, you need to do this right. And, the right thing is something you’ll need to decide to follow to the letter. Don’t dabble. Doing this right means you’ll need to consistently apply your chosen strategy for a good length of time.
And, since we’re talking about investing instead of trading, we’re looking at a commitment of at least three years to see some reliable pattern enough to tweak your personal investing rules.
So, here’s the process of coming up with your own rules. Take the time to reread and take notes to keep the keywords and ideas in mind to do further research on your own. And when you’ve read enough, sit down and write your own personal stock investing rules you’ll strictly follow for the next three years.
You’ll have rules about how you’ll evaluate which stock to invest. You’ll have rules on how much of your personal money you’ll use to invest. You’ll have rules about what you’ll do when the market drops…because it will. You’ll have rules on when to take out some of your profit. Follow your rules. Commit to it and follow it.
Point Number Two: Go Deep Into Value Investing
It was Warren Buffet who popularized Value Investing, something he learned from his teacher mentor Benjamin Graham who wrote a book on it called The Intelligent Investor.
Value Investing is an age-old principle in buying anything. It follows the common sense principle of buying low and selling high. You want to make sure you buy something that’s undervalued in the market, and in time, the real value reveals itself and the asset appreciates.
So, here’s the crux of the principle. How do you know if a stock is undervalued? Fortunately, I’ve got something here you can take with you to help you know which stock you may consider investments. It’s based on fundamental analysis of stock valuation, some of which you’ve heard about but you wonder what that was about.
You’ve heard of this before. That’s Price to Earnings Ratio. This ratio is effectively what you need to invest in a stock to get one dollar of earning from it. P is the current price of the stock. E is the annual earnings per share that usually comes quarterly. The ratio is the current price of the stock divided by the sum of a year’s quarterly earnings.
If this sounds complicated to you, just google it straight and you’ll get the PE Ratio of any publicly traded stock. What’s the big idea with PE Ratio?
It’s important because, generally, a higher PE Ratio means the stock is overvalued and a lower PE Ratio means the stock is undervalued. And you’re after undervalued stock, remember.
Here’s another you’ll have to know about PE Ratio. You cannot compare the PE Ratio of stocks from one industry or sector to another. You can only compare PE Ratios of stocks of the same industry or sector. It’s high or low depending on how it compares to others of the same sector.
The PE Ratio is high or low also based on its historic PE Ratio. If a stock was at 20 and now it’s at 30, then we can say its PE Ratio is high and may currently be overvalued.
Return on Equity (ROE)
This is the annualized net income of the company to shareholder equity. Huh? This only means how well the company uses its investments to generate growth in terms of earnings.You can google the ROE of any stock to find out. In general, ROE at 17% to 20% is very good, 20% to 25% is wonderful and above 25% is wow. The ROE adds to the picture of a stock’s valuation.
Price to Earnings to Growth Ratio (PEG)
PEG pertains to the quotient that comes from dividing a stock’s PE Ratio by its projected five-year earnings growth rate. This is a good measure you can use to evaluate if a company’s rapid growth makes sense or undervalued. Your Google browser can help you get that figure too.
Price to Book Ratio (PB Ratio)
The PB Ratio is the current share price divided by equity per share. If the PB Ratio of a stock is below one, the stock is less than the real value of the asset.
If the PB Ratio is above one, the stock is more than the real value of the asset. By computation, the Price to Book Ratio is the result of dividing the stock’s price per share by its Book Value which is the same as the stock’s Equity Per Share value. Again, you can just google in the stock’s Equity Per Share to get its Book Value.
There are few other metrics you may also use to help you evaluate a stock such as Debt to Equity Ratio and the Current or Liquidity Ratio. Just remember, once you’ve made a decision which of these tools you want to use to evaluate stocks, stick to it according to your rules and do keep a record for future adjustments. Investing is a journey on its own. You might as well keep tabs on it.
Another reminder, all these tools are there for one purpose for you: to know how to find stocks that are undervalued to invest.
Point Three: Building Positions
Now that you’ve found your undervalued stocks, what do you do? You may of course just straight up buy shares with your allocated investing fund. But, there are a couple of other ways of positioning yourself when you purchase shares.
One way is through Dollar-Cost Averaging. That means buying certain allocated shares of stock at regular intervals whether weekly or monthly. You can further specify buying more at set schedule as the stock drops and buying less as it appreciates.
Remember, we’re focusing on buying more when prices are down. Here are other criteria you may opt to have in your investing rules that make sure you’re buying undervalued, lower cost valuable investments. Buying in Thirds is another technique of positioning you might want to use. As the name implies, you may divide your intended fund for a stock into three.
You may then consider making your first purchase before an event, during the event and after the event. The event could be the introduction of a new product, some corporate change or seasonal uptick like Christmas. Follow these three guidelines: follow your investing rules, use the tools for finding stocks to buy and consider building your positions.