Investment fundamentals

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Once a company is declared as publicly operating company, we can buy or sell stocks to take part in the ownership of the company based on the number of shares you hold in the total number.

The price of a share usually depends on the demand for that share. Less supply, more demand, high price. More supply, less demand, low price.

Earnings per share: This gives you the information about the profits on each share.

P/E-Price/Earnings per share ratio can be considered as right quantity to value a share. Lesser the ratio, better.

Market capital or the total value of a company = price per share * a total number of shares.

Usually, total shares remain constant, but companies can increase shares and dilute your ownership. This results in a reduction of stock price.

Sometimes this reduction in stock price can be followed by an increase in profits because of the huge initiative coming from the cash raised by new stocks.

Market cap represents the public perception of the outstanding value of a company.

Even though you analyze thoroughly and decide to buy stocks of a particular company, you need to have a seller to buy them.

Do you know what does the point stock price moves to in next instance represent? How is it determined?

The price of a stock at any given time is merely the point of equilibrium at which the number of buyers willing to buy at that price is equal to the number of sellers willing to sell at that price.

Simply put, it is just a snapshot of the last price at which a stock price was traded at.

Factors that could affect a stock price:

1. Source of earnings of a company.

2. Public perception of the value of a company which creates demand, this could happen by quarterly and annual reports on profits of a company.

3. Announcements and news related to that company which will invoke certain emotions and reactions about buying or selling at what price.
The ideal situation for profits is identifying how many people want to buy these stocks in the future but not now. You want to identify stocks which have poor demand now but will likely have lots of demand in the future.

So if you are a newbie entering the market and convey your willingness to buy a stock, it will add value to that stock price and you help all other guys holding those stocks potentially earn more if they choose to sell it.

I believe earnings in investing happens when one person having a stock predicts that a stock price goes down in future and is willing to sell it and another person who predicts the opposite and willing to buy it. Obviously, only one thing happens in a particular time frame and the guy who predicted right will be happy as long as he keeps predicting to sell it at right time.

What are the investments against inflation?

The value of money decreases as time goes by. The amount of money it required to buy a car a few years back could be far less than what it would cost now. Are there any investments that secure the value of your money against inflation?

Invest in something that is scalable in terms of both money and time.

Identify and invest in automated systems because automated systems generate passive income and more reliable.

Real estate business is mostly determined by decisions of government and corporate monopolies. If the government decides to construct a particular infrastructure in a particular place, then the land around it gains value.


Factors to be considered while analyzing stocks:

  1. Company p/e to sector p/e ratio.
  2. Who is running the company? How much of his wealth is related to his own company?
  3. Charts of previous dividends and other financial histories of the company.
  4. Whether it is a monopoly or not? Monopolies are good for long term.
  5. Income sources of the company and their stability.

While gathering data, check whether stocks have been split or not.


 

Are the company resources under optimal utility?


Dhandho investing :

  1. Identify low-risk high return investments.

Calculating the intrinsic value of a business:

  1. Extrapolate the free cash flow of future years(how long you want to hold the business) of the business based on the history of it.
  2. Discount the cash flow for the inflation of future years and add the discounted cash flow of all of them.
  3. Predict and add the future sale price of the business.
  4. This gives us an approximate estimate of the intrinsic value of the business.

Some other things to look for during investing:

Moat: How hard is it for a newcomer to start and compete with this business?

Best investments can be of two types:

Value investments: If the Market cap of the company is way lower than the intrinsic value/ net worth of the company, if the book value is more than the Current Market price, then you are getting it for cheap and probably a good investment. But before betting on these kinds of stocks, check for the durability of the business and the possibility of liquidating your investment in the future.

Growth investments: Though the Market has rightly valued the stock, the company is steadily growing at a reasonably good growth rate in terms of ROCE/ revenue/ PAT etc. then you have a steady investment.


Some things to avoid while making investments:

  1. Airline business:
    1. Why? check this video.
    2. This also teaches that understanding underlying economics is more important than anything else before investing. Even a smart management can’t turn around the boat when the economic model of the business is bad.

Good debt vs Bad debt:

  1. As long as you manage to figure out some investment that grows faster than the interest rate of of your debt and gives more returns than what you need to pay, then that is good debt.

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