How to profit from investing in stocks
In today’s Stock Markets, you need to have greater control over your investments, your stocks. So how to invest in stocks? People think it is easy to profit from investing in stocks. Just pick a name and place an order. No? In this article, I will cover 5 key points to give discipline and direction in investing.
There is a great scene from the movie Moneyball when Billy first meets Pete down in the garage.
He was explaining how the manager of Baseball Clubs thinks of buying plays, when they must buy wins. The analogy for people who manage Equity Portfolios, think in terms of buying companies.
This may lead them to misjudge the companies they invest in. Instead, they must focus on buying earnings EPS “Earning per Share” or wins. In order to buy earnings you have to buy Sales, Sales per Share or runs.
MONEYBALL
To be prepared is to be focused on what you are paying for being the runs or Sales and the wins or Earnings. This means focusing on valuations, having access to data and being driven by data.
Of course, the analogy with Moneyball is not so simple. Many factors come into play in how to profit from investing in stocks. Risk management, diversification, circle of competence, of course, there are differences, but also many similarities.
You as an independent investor have to compete with the rich teams. Do the quiz based on this blog post, click HERE.
Let’s take a look at how to profit from investing in stocks
To develop “A Road Map” is to understand the Stock Markets, the analysis, the numbers, the valuations. This will put you in command of your Stock Investments, by providing a Road Map to research stocks. How to profit from investing in stocks. How stocks are valued.
Remember everyone who has a phone and a screen, so everyone, knows the price. But do they understand how to invest in stocks?
Very few know the valuations.
Being a successful investor in Equities, the key is efficiently and effectively researching Stocks. You must constantly think and question.
5 POINTS: how to profit from investing in stocks
- COMMAND OVER THE DATA
- UNDERSTANDING VALUATION TECHNIQUES
- MISPRICING ASSETS AND THE LONG GAME
- ESTABLISH YOUR CIRCLE OF COMPETENCE
- DUE DILIGENCE & RESEARCH
POINT 1 – COMMAND OVER THE DATA
To be a successful investor, you must develop your skill base. Knowing how to invest in stocks you have to invest in yourself. The key to this is having command over the avalanche of Stock Market data produced on a daily basis.
There is a lot of information available, historical and current stock prices. Company financial statements, the Balance Sheet, Profit and Loss and the Cash Flow Statement. Then the Stock Analysts provide their earnings estimates for the next two years. News from the company, news, analyst reports, and more.
The following are some typical metrics that investors should consider:
Stock Price: The bid ask spread, being the price at which a company’s shares are currently traded.
Market Capitalisation: The current Stock Price multiplied by all outstanding shares of a company.
Valuation Ratios: P/E ratio (price-to-earnings ratio) a valuation metric determined by dividing a company’s stock price by its earnings per share.
Dividend Yield: The amount of a company’s earnings that is paid out as a dividend. Divided by the Stock Price, this is the dividend yield, expressed as a percent.
Volume Traded: How many shares were traded on a particular day.
Technical indicators: This includes Moving Averages 20 Day, 50 Day. The MACD and the relative strength index (RSI). Investors can use these indicators to analyze stock price trends. Potentially identifying potential buying or selling opportunities.
During our lives, the investment decisions we make matter. They matter a lot, whether the investment is in Equities, Bonds or Real Estate.
In making investment decisions, the information available never really produces a clear Black or White result. Instead, often we have to determine what shade of Gray we prefer. We have to hedge our bets. To know profit from investing in stocks.
It is a numbers game and a successful investor in the Stock Markets will have command over the data and be driven by data.
Not difficult, but takes discipline.
How to invest in stocks is straight forward. It starts with understanding the data. I am not going to rank them. They are all excellent. The three Databases or Data Apps that I use are:
and 
POINT 2 – UNDERSTANDING VALUATION TECHNIQUES
In the stock market, a number of valuation techniques are employed. How to profit from investing in stocks requires you to know the three broad groups. There will be concepts that you are not unfamiliar with, but that is not to say Equity Valuation is “Rocket Science”. Valuing Equities is relatively straight forward.
To profit from investing in stocks: Three main concepts in Equity Valuations.
Intrinsic Value
Typically a Dividend Discount Model or by discounting future Cash Flows.
DDM
The Dividend Discount Model (DDM), calculates the present value of the future cash flows that a company’s dividends will produce. The fundamental basis of the DDM is that a company’s intrinsic value is the total of its future dividends discounted to a present value.
DCF
The Discounted Cash Flow (DCF) Analysis is based on a company’s anticipated growth rate of future cash flow. The DCF model calculates the present value of the company’s future cash flows plus a Terminal Value. The DCF is frequently used to value businesses with unpredictable cash flows or a business that does not pay dividends.
As a very broad distinction for when to use a DDM or the DCF. A DDM should be used for a company with a reliable dividend stream, typically in these sectors Utilities, Banks and Pharmaceuticals. The DCF would be more applicable for high growth companies, possible with a high CAPEX spend.
Relative Valuations
Involves comparing various Price Ratios and the Multiples applied against Sectors or Indexes or comparable Stocks. The analysis can go back over many years, even up to 10 years, to understand how the Stock Market was valuing a company by comparing a historic Price Ratio with the current ratio and the Mean value. How to profit from investing in stocks by understanding the past and the present.
PE RATIO
Price-to-Earnings (P/E) Ratio: This widely used valuation metric assesses the stock price in relation to the earnings per share of a company (EPS). By dividing the market value per share by the EPS, the P/E ratio is determined.
P/BOOK VALUE
Price to Book Ratio (P/BV): This ratio contrasts the market capitalization of a company with its book value (total assets minus liabilities). It shows whether a company’s stock is excessively or inadequately valued in relation to its assets.
P/ SALES
Price-to-Sales (P/S) Ratio: This ratio evaluates the relationship between an organization’s market value and its annual sales revenue. It is employed to value businesses with unstable earnings or those that are not yet profitable.
Enterprise Value to EBITDA Ratio (EV/EBITDA) : This ratio evaluates a company’s enterprise value, which is calculated as its earnings before interest, taxes, depreciation, and amortization divided by its market capitalization plus debt minus cash (EBITDA).
It is frequently used to value businesses in sectors with high capital expenditures or with high debt levels. The (EV/EBITDA) ratio is not a strict valuation ratio. It is viewed more as a capital efficiency ratio, comparing how a company are generating Sales, EBITDA or Net Profit by employed capital.
Event Valuation
Event valuation is a process of determining the economic value of an event, such as an acquisition, or the discovery of a large mining reserve. The Event Valuation involves estimating the total Cash Flows, Revenue minus Expenses associated with the project. Event Valuation is important for the Mining Industry and is the basis for Project Financing and Mergers and Acquisitions.
Equity Valuations are not a perfect science. It’s crucial to understand that no single method of valuation is infallible. Stock investors must employ a variety of Valuation Techniques, to their judgment when assessing a company’s stock and to keep in mind the Beta risk. If we can get 55% to 60% correct, we will make good money.
POINT 3 – MISPRICING ASSETS AND THE LONG GAME
It is true in understanding how to invest in stocks. All the above Valuation techniques assume that the Stock Markets misprice assets. Of course, this can happen. In particular, in less researched corners of the Equity Market. For example in Small Cap Stocks or in minor industrial sectors.
Mispricing assets refers to the current traded Stock Price for the Stock. The price does not accurately reflect its true intrinsic value. There are many reasons why this occurs. Top of the list is investor sentiment, market trends, or valuation models. If a stock is perceived to be mispriced, the investor can profit. Stock can be either purchased when undervalued or sold when overpriced.
Detecting mispriced stocks is not easy. Research and due diligence is required covering market dynamics and the economic environment. The two analytical disciples can be divided into Fundamental analysis and Technical analysis. The later is concerned with identifying patterns and potential mispricing.
This is in historical market data such as price trends and trading volumes. Also important to keep in mind, the Stock Market can misprice Stocks for a very long time. You may be right, but it can be difficult, and you must deal with the uncertainty.
Dealing with these situations is an important part of preparing yourself. Preparing for successful investing. Remember to beat the market you must be ahead of the market. This takes a lot of practice and discipline as a stock investor. You will have convictions about the valuations you have assigned to your Stock. But these convictions are questioned as new information arises. Your convictions should not be unbreakable. Stock markets do evolve.
POINT 4 – ESTABLISH YOUR CIRCLE OF COMPETENCE
Once you have command over the data, you need to establish your Circle Of Competence. The is a concept in investing in the Stock Market that refers to an investor’s expertise or knowledge. It denotes the set of industries, businesses, or investment opportunities.
Opportunities that an investor can comprehend, evaluate and command. Focus on what you know and avoid areas outside your expertise. Hopefully this will achieve more expected investment outcomes. Within an investor’s Circle of Competence, investors should make more informed decisions. This due to their higher level of knowledge. Understand where to look within your Circle of Competence. Stay within these boundaries. Over time, by all means, expand these boundaries by looking for new equities to cover.
In short:
Understand what Stock would you like to own,
or why you continue to own a Stock,
or when you need to sell the stock.
It could be:
What industry are you currently working in.
Your Education.
Your Interests.
Are you an Analytical person.
My advice is, at the beginning, work to your strengths.
Finscreener is a powerful financial analysis tool that allows investors and traders to screen and analyze stocks, ETFs, mutual funds, and cryptocurrencies based on various fundamental and technical criteria quickly and easily. The platform provides users with a wide range of filters, charts, and tools to help them find and analyze the right investment opportunities.
SUBSCRIBER TO FINSCREENER, CLICK BELOW
POINT 5 – DUE DILIGENCE & RESEARCH to profit from investing in stocks
Due diligence and research in investing in the Stock Market involves analysing companies. The research involves understanding the following. The financial performance, market position, management team, and competitive trends in the industry.
Having access to research and data is critical to profit from investing in stocks. If you don’t have access to research and data, you are guessing and picking the next quick story. I used the example of BARCHART, and FINSCREENER. For written research I use SEEKING ALPHA and any number of emails.
Wherever you get your research from make sure it’s;
Understandable – do not over complicate things.
The stock market valuations are at both the index – sector level and at the individual stock level. This makes it simple to do a compare and contrast valuation.
Robust
The services I mentioned before a adequate for Independent Investors.
Reliable (independent).
If looking at research, always understand who is paying and writing the research
Key Performance Indicators
A crucial aspect is evaluating a stock’s growth potential and competitive advantages. In particular over the long-term. To determine the long-term Key Performance Indicators (KPIs) used. KPIs cover the Strategic, Financial and Operational performance of a Company. The range of metrics used as performance indicators can be numerous. KPIs can cover a range of indicators. They can cover Financial Performance, Quality Control, Client Relationship Management. Also Employee Satisfaction and Product Management. Here are various steps to take when performing due diligence and research on a stock.
Steps Involved
Conclusion
It is easy to become overwhelmed when we look at data. Making the commitment to equity investing means practicing. To profit from investing in stocks it is important to keep following the Stock Markets. The media, the videos and it will all become easier. Make better investment decisions and avoid costly mistakes by due diligence and research.
2 Responses
Yes, I agree. I will continue with the series on Industry Classification, dealing with each industry individually. I will discuss the continued classification into Super Sectors, Sectors and Sub-Sectors. This Blog post was already way too long at over 4,000 words. Thanks for you input. Warren William