Broadly categorized, there are 2 investment strategies :
- GOING LONG ~ First buy and then sell. Investors makes profit by buying at low and selling at high.
- GOING SHORT ~ First sell and then buy. Investor makes profit by selling at high and then buying at low.
Generally people short when market is going to turn bearish and goes long when market is going to turn bullish.Shorting is more riskier and as well as profitable.
Technical analysis (market trend, moving average, RSI etc) is mainly used for shorting place.
Fundamental analysis (ROI, PE, ratio analysis, PBV etc) is mainly used for longing place.
First one is bit complex, I’m not also aware of it’s all different parameters. so let us try to understand fundamental parameters.
If you’re not a sort of professional in finance field then below basic but keen parameters may help you to judge great fundamental companies in short time. And believe me they are practically proven.
I see many things before locking my money in any stock…….. but in summarized way, let me tell you the 3 most weighted factor.
- Economic Moat
- Return on Equity (ROI)
I doesn’t care whether company stock is undervalued it overvalued, if it shows a great growth rate.
Let me answer it in more illustrative way.
Below are example of 2 stocks ~
This are two stocks with almost some stats….
- They both belong to bank sector.
- Their PE is 11.
- PBV is almost same.
- They both have market cap in 6 digits.
- Their dividend is hovering around 3-5 INR per share.
Most remarkable point is (as per my calculation) SBI is cheaper and undervalued then ICICI at present data.
But when it comes to investing, I’ll definitely invest in ICICI instead of SBI.
Why? What made me taking this step despite per my calculation SBI is more cheaper?
Answer is in one word ~ GROWTH.
Have a look over their last five-year earning trend.
SBI STOCK EPS
Ttm – 16
2015 – 17
2014 – 14
2013 – 20
2012 – 17
2011 – 11
ICICI STOCK EPS
Ttm – 20
2015 – 19
2014 – 16
2013 – 14
2012 – 11
2011 – 9
Now it doesn’t need Einstein mind to figure out which stock shows a growth trend.
Growth have a great impact on value investing. It may not give satisfactory return in short run but in long, it will fill up your bank account.
Let us try to understand how growth stocks create wealth in stock market.
That’s $5 million per second, if you’re wondering.
So how he made $6 billion in just 20 minutes?
Again the answer is same ~ GROWTH.
Shares jumped nearly 13 percent to $679 in after hours trading.
Share price hiked from $600 to $679 in just 20 minutes.
AMAZON’S EARNINGS GROWTH AT A GLANCE (outsourced from dailymail)
Amazon’s net sales in North America, its biggest market by revenue, increased 26.8 per cent to $17 billion in the firstquarter.
Revenue from its cloud services business, Amazon WebServices, surged 63.9 percent to $2.57 billion.
The unit, Amazon’s fastest growing business, is the next driver of growth for the company.
Amazon reported net income of $513 million, or $1.07 pershare, for the quarter ended March 31.
It’s a lot of freaking money.
Lets switch to second parameter.
It is the competitive advantage that one company has over other companies in the same industry. This term was coined by renowned investor Warren Buffett.
It gives a long term protection to the investor.
Let’s take an example, fully outsourced from Investopedia.
Suppose you have decided to make your fortune by running a lemonade stand.
You realize that if you buy your lemons in bulk once a week instead of every morning, you can cut your expenses by 30%, making you able to undercut the prices of competing lemonade stands.
Your low prices lead to an increase in the number of customers buying lemonade from you (and not from your competitors). As a result, you see an increase in profits.
However, it probably wouldn’t take very long for your competitors to notice your method and use it themselves. Therefore, in a short span, your large profits would erode, and the local lemonade industry would return to normal conditions again.
However, suppose you develop and patent a juicing technology that allows you to get 30% more juice out of the average lemon. This would have the same effect of reducing your average cost per glass of lemonade.
This time, your competitors will have no way of duplicating your methods, as your competitive advantage is protected by your patent.
In this example, your economic moat is the patent that you hold on your proprietary technology.
If your lemonade company was a public firm, your common stock would probably outperform that of your competition in the long run.
That’s how you can gain long-term comparative advantage by investing in the stock with great economic moat.
Patent copyright is the best way for economic moat.
Many bluechip companies like Apple, Google, Sony etc time to time buy parent for their newly emerged product……(see the illustration below)
That’s how this companies gain long-term benefits.
“Return on Equity (ROE)”
Here’s what I would do to find great pick on mid or small market…..
- Filter the stock on the basis of average ROE > 20%.
- Then compare it with its current market price.
- If its CMP perfectly reflects its ROE then it’s a great buy and if not, follow whole process on other stocks.
This is one of the promising factor. Let me illustrate it with more authentic prove…..
Below are some companies which delivered multi-bagger return in past several years.
And do you know, what’s common in them?
Their ROE is surprisingly high.
Should I invest in them now?
This would be your biggest mistake.
Their price doesn’t comply with their ROE. Now they are highly overvalued.
Instead find some other stocks with high ROE and low market price.
To add some spirit to your research, below is one example with high ROE and low CMP.
Growth, Economic moat and Return on Equity are 3 basic parameters for a layman investors. So what you’re waiting for, cobble up your portfolio, create a shortlist and lock your money.
As always, I’ll be in the comments if you have any questions.