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Thursday, February 12, 2015

3 step guide for value stock investing

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Value Investing is probably the best and safest long term investment technique which has made many billionaires across the world, including the all time great - Warren Buffett. All the people who understand basics of stock markets
always prefer doing value based stock investing as it is a sure shot way of making profits from Stock markets. Other forms of investing in stocks like Day trading and short term investing looks rather foolish ways when compared to Value Investing in Stock markets.

However Value Investing needs a diligent analysis approach from a person, One need excellent analytical skills for shortlisting businesses to invest into. In This post I would explain a 3 step guide for starting a career in Value Investing.

I'll start this 3 step approach for value investing, but first an excellent quote on Value Investing by Warren Buffett: "It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price"

Lets start!
Value Investing Step 1: Identify 10 probable companies for Investing
Stock Markets is a huge domain to understand, there are thousands or probably million of companies stocks available for sale/purchase on a Stock Exchange floor. This huge number of companies often become to confusing for first time stock market investor. Hence the best approach for a newbie in Value investing is to identify ten probable companies from which further shortlisting needs to be done. Working with thousand probable companies is not practically feasible if he wants to perform some tangible analysis. Select only 10 companies using following basic identification criteria: Get a blank paper and pen for writing these 3 steps and try to understand them diligently.
a) Return of Equity: 15 percent ROE is a good number for shortlisting a stock. Discard any company whose Return of Equity is less then 15 percent.
Jot down 10 companies in decreasing order of ROE percentage on a plain paper. b) Debt-to-Equity Ratio: Debt to equity ratio is very important selection metric for value investing. I have explained Value investing basics in this post. Read this before moving any further. Debt to Equity ratio should be under 0.5 percent for a company.

c)Current Ratio: Current ratio of a company shows it's ability of paying off short term debts. if any company has current ratio in this side of 2, then refrain from shortlisting such company for value investing.

Value Investing Step 2: Bring list from 10 to 3: Next step in this three step approach for Value investing and probably most important step is to bring the list of 10 companies(from step 1) down to final 3 contestants. These 3 companies should be best 3 from the initial ten companies shortlisted. There are lot of metrics which needs to be caluculated and analysed. Since I have already explained these metrics in my previous post titled 'value investing for beginners' hence I would not reiterate all of them again here. Do come back to this post after reading this post.

Value Investing Step 3: Choose the best of 3: This step is rather much simpler when compared to previous 2 steps. You can choose all the three companies and diversify your investment, or if you have very limited resources for investing then select the one with most healthy metrics data including the P/E ratio, Earning per share, quality of company management. After you choose the best of 3, invest your money and forget for 3-5 years, see your investment probably doubling after 5 years for sure.

It's sure that a person can earn huge fortunes from stock markets if he approaches it in correct manner. Hush-hush investing is a big NO for stock market investing especially Value investing, because afterall it's the long term goals which matter the most in investing

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