15 September 2011

Value Investor: Five Important Steps to Succeed in Stock Market Investment

I still remember the first time I studied financial report and tried to analysis the data, I had no idea where should I start from and where should I go to. Finally, after unstoppable learning and trying, I figure out five essential steps which I do every time before I invest my precious money in the particular company. As my senior, who is my mentor in stork market investment, told me, sharing the way to get profit in stork market and ultimately improve the life of the people around us is one of the duty for value investor. Therefore, in this post, I will like to share with you a humble procedure I used in stock market investment:

1. Earning per Share (EPS)
- To me, if a company does not get profit in the time its competitor does, we should consider its competitor for further analysis.
- If EPS is too few compared to its market price, that is, high PE ratio, we should carefully think about the future prospect of the company. Ask yourself whether the EPS of the company can keep increase in such a way the PE will be reduced or maintained in the future?
- High market price of a good company is not always a good investment; Low market price of a average company may be a good investment, however. Therefore, the buying price of a company will determine whether we will succeed or not in each investment.

2. What the balance sheet consists of?
- Is it financial condition healthy?
- Has it got lots of Receivable, inventory, cash or debt?
- Normally, I prefer company which has acid ratio greater than one, zero borrowing and lots of cash. Impossible? In fact, 4 of 5 companies I has invested now fulfill these requirements. Possible or not is dependent on your determination and commitment.

3. How the company uses its cash.
- Based on its cash flow statement, we will know where the money came from the where the money gone.
- This is very important to get rid of bad company and discover potential cash-cow company.
- Cash-cow company is a company which can easily accumulate or generate lots of cash annually. As a result, this kind of company normally does not need to borrow money from bank, and the money will be returned to its shareholders in terms of dividend or bonus annually.

4. What is the prospect of directors or chairperson toward the company?
- The prediction of chairperson should base on previous accuracy. In other words, we can base on previous chairperson's statement to determine whether the chairperson is too optimistic, quite honest, or humble.

5. The dividend payout
- It is very crucial for every investor. If a good company which earns lots of money but does not want to share portion of its profit with shareholder in terms of dividend or bonus, we should seek for other good investment.

After that, do combine all the information above and do final decision based on previous record and business future prospect.

In addition, we can also do some sort of searching from Google, newspaper, press release etc. to get know the current trend of the business to enhance our confidence toward our decision.

That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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