Here this blog gives three main reasons why people buy stocks:
- because someone asks them to buy
- based on trends, momentum and technical indicators
- people buy because of price vs perceived value
And all of these are wrong reasons. I was glancing through "Tao of Warren Buffett" and there was a quote from Buffett, where he suggests that an investor ought to read Ben Graham, Phil Fisher and the company’s annual report and then make the decision. I couldn’t agree with him more!! Except that I would add that one also should read up on his Annual Letters to Berkshire Hathaway’s shareholders!
We spend more time on buying shoes worth $30 than buying stocks worth $10,000! The amount of analysis that goes into the decision on shoes is more than that which goes into the buying of stocks! That is a bad trend. Moreover, we buy the stocks for wrong reason. Stock purchase is NOT a One-Night-Stand kind of relationship but should be approached like a marriage! It is something that is for a long term. In that sense, I look at these main metrics:
- Net Profit Margin (NPM)
- Sales Growth
- Return on Equity
- Business model and industry future & company’s situation within that industry!
- Cash flows
- difference between Operating Profit Margin and NPM.
These metrics help me understand the future longevity of the company’s strength. I am not patient enough to go into the Annual Reports in detail.. but I intend to do that. However, I have been investing in the US markets since 1998, and in NO ANNUAL YEAR have I been negative, irrespective of boom or bust. I have avoided internet stocks, Google, Qualcomm (during the boom time) etc. I hate the "hot stocks" .. but I go for companies which I feel have a long term strength. I am buying (direct investment) and have bought these main stocks (that I like):
- Yahoo – will remain the defacto #2 in internet businesses
- Exxon-mobil – the largest Oil & Gas play
- ICE (intercontinental Exchange) – the hot star in the exchange markets .. Mid-east war/global warming will bring volatility which will lead to more hedge/future buys for energy – so this exhange benefits
- MO (Philip Morris) – this is a stable workhorse… China and India are two huge markets that it will gain from a lot
- Optionable (OPBL.OB) – it has investment from NYMEX (ICE’s competitor), and provides platform for derivative trading.
- Chevron – I have done a project many years ago in this company… and I have a very high regard for their high caliber staff.. and efficient processes. I have a refrain "If this company’s staff cannot handle a project worth a few millions, there is no way it can handle a business (and related decisions) worth billions!!".. and Chevron-texaco was a model project and client in my eyes!
Btw, all of these companies have stellar financials – specifically the metrics I just listed up there. Check them out on Yahoo Finance (in the Key Stats section)
What do you think?
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