The Perfect Guide on Buying Stocks 0 4013

Many investors, especially those who are new, do not know how to go about investing or where they can find ideas for investing.

Is there really any secret way to choose good stocks? You don’t have to rush up to buy the stock today or by this week. It remains there, so you can take time to investigate before you invest.

The smartest way to win the market is to invest for both growth and value. It doesn’t depend on your ability to predict the direction of the economy or even the direction of the stock market.

It’s all depending on your willingness to apply the following measures before you place your order. The winning techniques are tried and true. Here, RollnReel explains you how to assemble and apply them and make the difference.

Earnings Per Share:

Earnings are the company’s main resource for paying dividends to shareholders and for reinvesting in the business growth. So, we need to look for the companies with a pattern of earnings growth and a habit of reinvesting a significant portion of earnings in the growth of the business. EPS (Earnings per share) is the amount of money each share of stock would receive if all of the profits were distributed to the outstanding shares at the end of the year. Highest earning per share is always better it means the company has more profits to distribute to its share holders.

Price-Earnings Ratio:

It’s most important to know the P/E ratios of the stock. Once an investor knows, a company’s EPS, he can work out the price/earnings ratio. It is equal to stock market price divided by the EPS. A low p/e ratio indicates the company is more mature while with high p/e ratio, it indicates the company is fast growing and also it’s a more risky investment. Compare the p/e ratios with the peer companies, with the low p/e can be considered as a good bargain, where as with high, warns of an overpriced stock. Before investing, it’s important to do a thorough research into the background of the company.

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Dividend Yield:

Companies distribute a portion of their profits as dividends, while retaining the remaining to reinvest in the business. It is calculated by dividing the dividend per share by the market price per share and multiplying the result by 100. It is usually expressed as a percentage. The investors need to the check valuation as well as the dividend-paying track record of the company.

Book Value:

The price of a company’s stock is higher than its book value, and it’s recommended as cheap because they are selling below book value. Book value per share indicates the book value (or accounting value) of each share of stock. Book value is a company’s net asset value, which is calculated by total assets minus intangible assets and liabilities.

Return on Equity:

The return on equity number is the company’s net profit after taxes, divided by its book value, and it can usually be found in the annual report. If return on equity is growing year after year, the stock’s price will tend to show long-term strength, compare it with the return for other companies in the same industry. A steady return on equity shows its managing well on the other hand even though profits are steady, if it declines, it may have some uncovered problems with debt and it’s probably better to stay away.

Debt-Equity Ratio:

The debt-equity ratio shows how much leverage, or debt, a company is carrying, compared with shareholders’ equity. A high debt-equity ratio means the company has been aggressive in financing its growth with debt; it’s associated with high levels of risk.

Price Volatility:

It is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease.

So by checking all the above points, we can make a conclusion. Have a great time ahead, do your own research and make good profit.

Stay tuned to our next post “The Perfect Guide on Selling Stocks”

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The 5/25 and 80/20 rule 0 42

Warren Buffett as we all know him not only thinks about securities all the time but also spends some valuable time making the world a better place and life easier.

His 5/25 rule originates from an anecdote from one of Warren Buffett’s employees. The story goes like this…

Warren Buffett one day approaches his pilot, after realizing that he had worked for him for the past 10 years. Buffett wanted to discuss his pilot’s career goals and wanted to help him achieve them. “The fact that you’re still working for me, tells me I’m not doing my job” said Buffett. To map out the pilot’s goals, he was asked to conduct a simple exercise by Buffett, it would later go on to change the way he viewed his priorities forever…

The first thing in the exercise was to list out 25 things that the pilot wanted to achieve in the foreseeable future. Secondly he had to arrange them in the order of importance (descending) and circle the top 5. During the exercise, he found out that prioritising his goals were undoubtedly more challenging than listing them. Buffett later asks his pilot :

What are you going to do with the remaining 20 items?

The pilot replies with :

Well the top 5 are my primary focus, but the other 20 come in at a close second.

He goes on…

They are still important so I’ll work on those intermittently as I see fit, as I’m getting through my top 5. They are not as urgent but I still plan to give them dedicated effort.

At this point Buffet’s expression changes a little and responds sternly :

No, you’ve got it wrong. Everything you didn’t circle just became your ‘avoid at all cost’ list. No matter what, these things get no attention from you until you’ve succeeded with your top 5.

Avoid at all cost!? His pilot certainly wasn’t expecting that.

Buffett’s 5/25 rule states the importance of selective focus. There’s more competition for our attention than ever. Choices have never been more abundant than any other time in history and it’s unlikely we’ll be constrained any time soon. In fact, our options are likely only going to expand as we advance further. More the people, more the diversification among them, more the desires, therefore resulting in more choices.

It’s the primary reason why most of us will never reach the level of competency needed to reap the rewards of being a superstar like Warren Buffett himself. Each time we pursue a new course of action, we incur an opportunity cost. It takes our time and attention away from the things that are most important to us. Your odds of success improve when you direct your focus into a singular pursuit. You have to double down on a few things and rack up the hours trying to get really good at that. The 5/25 rule is another example of how simplicity makes life better and easier. Warren Buffett doesn’t mean to say that you have to lead a boring life doing the same thing over and over again. Once you have mastered the 5 circled goals, move on to number 6 and beyond but mastering your tasks could take years and needs all the effort and concentration, because we spend time on these only during our free time and we all have other commitments which are out of our control.

If all of us were asked to do the same exercise as his pilot was, most of us would struggle. The result is that we have a list of items that will almost never get completed. This list only weighs on our mind, and fills us with stress, guilt and overwhelm. It’s a result of the ‘any benefit’ mindset. If you observe carefully, you would realize that you put some things on your list of 25 only because you believe you’re going to benefit something from learning or mastering it and not actually because you want to do it. It is that feeling where you believe you can do a lot more things at once than you actually can concentrate on and feel like “If I learnt how to play a guitar, I could participate on stage events and become popular”, when that’s not what you actually want to do. You add those extra goals in that list of 25 only because you feel a dopamine hit.

Pareto’s principle, popularly known as the 80/20 rule tells us that the majority of outcomes are driven by a small number of things that we do. Chances are that anything that falls outside your top 5 will have little impact on your life. Rather than add on, take the time to eliminate.

Time and attention are two of the most finite resources. There will always be more good opportunities than we realistically have time for. We shouldn’t pounce on every one of them, because not all will be right for us. It doesn’t matter how good an opportunity is if all it does is advance goal number 25 for us. If we force ourselves to eliminate options, we would find that only a few things truely matter to us. We would be better served if we ignore distractions and do more of what really matters.

Use the ‘Pomodoro technique’ to shut down all external distractions. The pomodoro technique involves concentrating for a short time span separated by shorter breaks. Break down your work intervals into 25 minutes separated by a 5 minute break and after every 4 sessions, take a longer break. Ideally 10–12 sessions a day could help you master almost anything within 6 months – 1 year.

Another place where most of us fail is during the dip in the transition cycle

When we experience the opportunity to learn something new, we enter into what’s called the ‘Honeymoon phase’. This is where we experience releases of dopamine as we experience new things, we’re hardwired to appreciate and seek out novelty because it makes us feel good. Once the ‘Honeymoon phase’ is over we experience the dip and our progress begins to plateau or diminish and this is when most of us quit. If you can predict the dip is coming when you’re learning something new it’s easier to fight through it because you know the dip exists and it only lasts temporarily.

Vilfredo Pareto, an Italian economist found that 80% of the land in Italy was owned by 20% of the population. This 80/20 distribution became popular for occurring over and over again in many scenarios. For example, about 20% of the world’s population control about 80% of the world’s income. The 80/20 rule by Pareto is the same as Buffett’s 5/25 rule (5 is 20% of 25). You could infact verify it with your own daily life events, you would approximately wear only 20% of the clothes in your wardrobe 80% of the time, if you were to have 5 shoes, you would wear only 1 of them 80% of the time. About 20% of a business’s clients account for 80% of their revenue. This might not always be the case though (but it predominantly is), that being said one can use this to analyze your life and optimize it. For an example, if you have an exam tomorrow but decide to start only the night before. Say you have 10 topics for the exam, pick the 2 topics that would maximize your result, meaning spend time on learning that 20% of your syllabus to earn 80% of the marks. You can use the remaining time, if you have any, to learn the remaining 80% of the syllabus that would fetch you only 20% of the marks, you at least get the important things out of the way and have managed to maximize your result in a minimum time frame.

The Pareto’s principle gave rise to one of my most personal favorite papers to have ever been published. It refers to the phenomenon as ‘The champagne glass effect’.

The paper goes on to explain with deep picturization on how the champagne glass represents the 80/20 rule and how the bowl on top represents the top 20% of the people who have a part of 80% and the rest 80% of the glass, the stem supporting the bowl’s weight with less than 20% of it’s entire weight.

Hope the answer helped you and gave you an insight. Peace 🙂

 

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