Stock Picking - Its importance.
When it comes to personal finance and the accumulation of wealth, few
subjects are more talked about than stocks. It's easy to understand why:
playing the stock market is thrilling. But on this financial roller-coaster
ride, we all want to experience the ups without the downs.
In this tutorial, we examine some of the most popular strategies for
finding good stocks (or at least avoiding bad ones). In other words, we'll
explore the art of stock-picking - selecting stocks based on a certain set of
criteria, with the aim of achieving a rate of return that is greater than the
market's overall average.
Before exploring the vast world of stock-picking methodologies, we should address a few misconceptions. Many investors new to the stock-picking scene believe that there is some infallible strategy that, once followed, will guarantee success. There is no foolproof system for picking stocks! If you are reading this in search of a magic key to unlock instant wealth, I’m sorry, but i know of no such key.
This doesn't mean you can't expand your wealth through the stock market. It's just better to think of stock-picking as an art rather than a science. There are a few reasons for this:
1. So many factors affect a company's health that it is nearly impossible to construct a formula that will predict success. It is one thing to assemble data that you can work with, but quite another to determine which numbers are relevant.
2. A lot of information is intangible and cannot be measured. The quantifiable aspects of a company, such as profits, are easy enough to find. But how do you measure the qualitative factors, such as the company's staff, its competitive advantages, its reputation and so on? This combination of tangible and intangible aspects makes picking stocks a highly subjective, even intuitive process.
Before exploring the vast world of stock-picking methodologies, we should address a few misconceptions. Many investors new to the stock-picking scene believe that there is some infallible strategy that, once followed, will guarantee success. There is no foolproof system for picking stocks! If you are reading this in search of a magic key to unlock instant wealth, I’m sorry, but i know of no such key.
This doesn't mean you can't expand your wealth through the stock market. It's just better to think of stock-picking as an art rather than a science. There are a few reasons for this:
1. So many factors affect a company's health that it is nearly impossible to construct a formula that will predict success. It is one thing to assemble data that you can work with, but quite another to determine which numbers are relevant.
2. A lot of information is intangible and cannot be measured. The quantifiable aspects of a company, such as profits, are easy enough to find. But how do you measure the qualitative factors, such as the company's staff, its competitive advantages, its reputation and so on? This combination of tangible and intangible aspects makes picking stocks a highly subjective, even intuitive process.
3. Because of the human (often irrational) element inherent in the
forces that move the stock market, stocks do not always do what you anticipate
they'll do. Emotions can change quickly and unpredictably. And unfortunately,
when confidence turns into fear, the stock market can be a dangerous place.
The bottom line is that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory - a "best guess" of how to invest. And sometimes two seemingly opposed theories can be successful at the same time. Perhaps just as important as considering theory, is determining how well an investment strategy fits your personal outlook, time frame, risk tolerance and the amount of time you want to devote to investing and picking stocks.
At this point, you may be asking yourself why stock-picking is so important. Why worry so much about it? Why spend hours doing it? The answer is simple: wealth. If you become a good stock-picker, you can increase your personal wealth exponentially.There are several stocks which have multiplied 10x 20x 50x 100x over a period of time. Thus if one becomes a good stock picker then one can multiply their wealth and can give huge returns.
The bottom line is that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory - a "best guess" of how to invest. And sometimes two seemingly opposed theories can be successful at the same time. Perhaps just as important as considering theory, is determining how well an investment strategy fits your personal outlook, time frame, risk tolerance and the amount of time you want to devote to investing and picking stocks.
At this point, you may be asking yourself why stock-picking is so important. Why worry so much about it? Why spend hours doing it? The answer is simple: wealth. If you become a good stock-picker, you can increase your personal wealth exponentially.There are several stocks which have multiplied 10x 20x 50x 100x over a period of time. Thus if one becomes a good stock picker then one can multiply their wealth and can give huge returns.
Ever heard someone say that a company has "strong
fundamentals"? The phrase is so overused that it's become somewhat of a
cliché. And analyst can refer to a company's fundamentals without actually
saying anything meaningful. So here we define exactly what fundamentals are,
how and why they are analyzed, and why fundamental analysis is often
a great starting point to picking good companies.
The Theory
Doing basic fundamental valuation is quite straightforward; all it
takes is a little time and energy. The goal of analyzing a company's
fundamentals is to find a stock's , a fancy term for what you believe a
stock is really worth - as opposed to the value at which it is being traded in
the marketplace. If the intrinsic value is more than the current share price,
your analysis is showing that the stock is worth more than its price and that
it makes sense to buy the stock.
Although there are many different methods of finding the intrinsic value, the premise behind all the strategies is the same: a company is worth the sum of its discounted cash flows. In plain English, this means that a company is worth all of its future profits added together. And these future profits must be discounted to account for the time value of money, that is, the force by which the $1 you receive in a year's time is worth less than $1 you receive today. (For further reading, see Understanding the Time Value of Money).
The idea behind intrinsic value equaling future profits makes sense if you think about how a business provides value for its owner(s). If you have a small business, its worth is the money you can take from the company year after year (not the growth of the stock). And you can take something out of the company only if you have something left over after you pay for supplies and salaries, reinvest in new equipment, and so on. A business is all about profits, plain old revenue minus expenses - the basis of intrinsic value.
Although there are many different methods of finding the intrinsic value, the premise behind all the strategies is the same: a company is worth the sum of its discounted cash flows. In plain English, this means that a company is worth all of its future profits added together. And these future profits must be discounted to account for the time value of money, that is, the force by which the $1 you receive in a year's time is worth less than $1 you receive today. (For further reading, see Understanding the Time Value of Money).
The idea behind intrinsic value equaling future profits makes sense if you think about how a business provides value for its owner(s). If you have a small business, its worth is the money you can take from the company year after year (not the growth of the stock). And you can take something out of the company only if you have something left over after you pay for supplies and salaries, reinvest in new equipment, and so on. A business is all about profits, plain old revenue minus expenses - the basis of intrinsic value.
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