Making money is the name of the game, but exactly how does someone go about doing that? You clearly have to buy the stock when the price is low and sell it when the price goes up. That's the most obvious was to make money investing on the stock market. Every investor tries to figure out when to go into and out of stocks, but timing the market never works. So there has to be a better way to assess the value of stocks.
Many experts will recommend that you look at ratios like the PE ration and if it is low, that would mean that the stock is relatively cheap because it's earnings are high relative to its price. Other people will instruct you to take note of the ROE metric to figure out whether an investment is worth your time. They will tell you that an ROE over 10% for the past 5 years is a solid investment. Low debt and lots of sales help make the case for some companies, but the real question is still, how do you know what the stock price should be?
One of the methods of evaluating a stock price is to leverage a discounted cash flow model to arrive at an estimate for the intrinsic stock value. These types of models state that the value of a stock is the present value of future free cash flow for the company. When you have figured that out, the next step would be to compare the value you calculated to the current share price. Depending on that comparison you can determine whether it is worth buying the stock or not.
The other metrics that go into figuring out the Intrinsic Stock Values include determining the projected free cash flow for the company, which can usually be deduced by looking at the company's recent free cash flow and estimating a future value. That type of information can be obtained from the company's Cash Flow Statements by subtracting Capital Expenditures from Cash from Operating Activities.
The FCF growth rate is also something that needs to be taken into account for these types of models. Values between 0% and 8% are typical of companies with good track records for delivering consistent FCF. If the value is lower than 0% you should question whether you should invest in that company since you believe that the company won't do as well as in the past. If the value is higher than 10% you're probably over estimating the company's ability to increase FCF over the long term.
The discount rate is important because it allows you to factor in risk into the equation. A 9% discount rate is considered low risk for a company, and a discount rate of 15% or higher would mean that the company is a fairly risky one to invest in. The last rate to keep track of is the perpetuity growth rate which fluctuates between 2% and 3% depending on whether there is a rising or falling market.
All of this data will help you realize what the actual intrinsic value of the stock will be, but it won't tell you whether you've made a mistake in your calculations. In order to account for the possibility of an erroneous calculation you will have to look at the margin of safety that is essentially a measure of what your error rate can be. The value to look for here is to make sure that you have a margin of safety above 30%.
To ensure that you haven't made errors in your login, you must go in a review the annual reports for the company, including 10k reports and financial statements. Doing so will enable you to validate that you have made correct assumptions in your calculations for intrinsic value.
Many experts will recommend that you look at ratios like the PE ration and if it is low, that would mean that the stock is relatively cheap because it's earnings are high relative to its price. Other people will instruct you to take note of the ROE metric to figure out whether an investment is worth your time. They will tell you that an ROE over 10% for the past 5 years is a solid investment. Low debt and lots of sales help make the case for some companies, but the real question is still, how do you know what the stock price should be?
One of the methods of evaluating a stock price is to leverage a discounted cash flow model to arrive at an estimate for the intrinsic stock value. These types of models state that the value of a stock is the present value of future free cash flow for the company. When you have figured that out, the next step would be to compare the value you calculated to the current share price. Depending on that comparison you can determine whether it is worth buying the stock or not.
The other metrics that go into figuring out the Intrinsic Stock Values include determining the projected free cash flow for the company, which can usually be deduced by looking at the company's recent free cash flow and estimating a future value. That type of information can be obtained from the company's Cash Flow Statements by subtracting Capital Expenditures from Cash from Operating Activities.
The FCF growth rate is also something that needs to be taken into account for these types of models. Values between 0% and 8% are typical of companies with good track records for delivering consistent FCF. If the value is lower than 0% you should question whether you should invest in that company since you believe that the company won't do as well as in the past. If the value is higher than 10% you're probably over estimating the company's ability to increase FCF over the long term.
The discount rate is important because it allows you to factor in risk into the equation. A 9% discount rate is considered low risk for a company, and a discount rate of 15% or higher would mean that the company is a fairly risky one to invest in. The last rate to keep track of is the perpetuity growth rate which fluctuates between 2% and 3% depending on whether there is a rising or falling market.
All of this data will help you realize what the actual intrinsic value of the stock will be, but it won't tell you whether you've made a mistake in your calculations. In order to account for the possibility of an erroneous calculation you will have to look at the margin of safety that is essentially a measure of what your error rate can be. The value to look for here is to make sure that you have a margin of safety above 30%.
To ensure that you haven't made errors in your login, you must go in a review the annual reports for the company, including 10k reports and financial statements. Doing so will enable you to validate that you have made correct assumptions in your calculations for intrinsic value.
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These Value Investor principles are explained further in the Value Investor Headquarters website. The Value Investor Headquarters website is the top place on the internet for investment strategies.