Stock Market (3)

Stock market information – Selection & Valuation

When I bought my first stock in the early 1990’s, there was no email, internet, mobile banking or 24-hour-stock-market-channel available.

To obtain information about a stock, I intended to buy, I had to call around for hours or patiently search the archive of the newspaper in my town.

Whereas today, I can get any information, be it the quarterly earnings of a chip factory in Taiwan or the turnover of a sugar producer in Brazil, within seconds and without moving too much. In plus, I get around-the-clock live-data worldwide via CNBC or Bloomberg TV, channels 424/425, if you receive UPC.

Easy access to information can be a huge advantage for an investor, I have no doubt. But I got the impression, that for many new investors it’s too much and they are hopelessly lost in this ocean of news, data and stock market opinions.

Selection

In order not to sink to the bottom of this ocean but to stay on top, I recommend a time voyage back to 1990’s. To find the first stock you might buy, put your tablet or iphone away for a moment and use your environment, as I did – and it worked quite well.

Two of my first stocks were Nestle and later Adidas. I the case of Nestle it was the sentence of a former teacher, I met while waiting at the cash out of a crowded supermarket. Watching all those people with filled shopping carts, he said ‘in good or bad times, people always have to eat’.

That’s why I considered the global food producer Nestle is a safe investment. A visit to the newspaper archive was the next step and encouraging, when I learned, that Nestle was targeting countries with high population-growth like Indonesia and just about at that time was also further expanding into the markets of the former east block – including Romania.

I figured, that this strategy will have a positive impact on Nestles earnings and consequently the stock price.

With that basic knowledge, I opened a securities account at my bank and bought 10 Nestle shares.

In the case of Adidas, I remembered all to well how I was dreaming of adidas sneakers but my parents wouldn’t buy them, instead I got only some no-name shoes. ‘Adidas is way to expensive’ I heard time after time. And I was not the only hopeful soccer player who wanted, but didn’t get Adidas. You can imagine, what I did, when I finished a summer job at my uncles company and got a little money – the sneaker ‘Adidas Roma’ didn’t left my feet except for sleeping.

From an investors perspective, it’s something to look into, when there is a great demand for a product by ordinary people. Adidas would never lower the price to sell more, instead by sponsoring winning athletes or Bayern Munich, the brand became even hotter. So when Adidas went public at stock market in Frankfurt, I ordered some shares right away.

Better than surfing randomly through thousands of websites looking for stock-tips, think about ‘what company offers a product people would buy?’ a) because they have to like food or medicine or b) because they really want it and are paying almost whatever it takes (Apple products would fit in the second category).

A Doctor would know which company has the best medical equipment, a restaurant owner is aware of the company who delivers the most ordered whiskey to his joint. When it’s Johnnie Walker, then why not consider to buy shares of the producer? – this would be Diageo.

Valuation

Between considering to buy and actually making money with a stock lies a huge roadblock called valuation. The best company in the world is a no-buy when the stock is too expensive.

To figure out, if a stock is cheap and a sure buy or expensive (then hands off) there is, as a general rule, the Price/Earnings ratio (P/E) to check.

The P/E basically measures the relation between the actual stock price and the earnings per share of a company. The lower the P/E, the cheaper the stock.

A P/E of under 10 is considered cheap, the stock has upside potential, if the P/E is between 10 and 15 it’s still a good opportunity, above 15 one has to be more careful and accept some setbacks and if the P/E is 20 or higher the stock is most likely too expensive.

Again this is only a very general rule, but should give a first impression. (In a later chapter, we come back to this issue, particularly have a look at amazon.com where the P/E is not very useful)

But for many stocks the P/E is a solid valuation base, investors find this number and much more information on any corporate website usually under the button ‘investor relations’.

——

We are all humans – unfortunately perfectly human behavior leads sometimes to big mistakes at the stock market – that’s the topic in the next subchapter: http://www.theleader.ro/stock-market-4/