Sunday, 3 August 2014

When should we click the buy button?

First and foremost, we must have money on hand. And, you have to make sure you not intend to use the said money for next few years.

Then, we can click buy button once:-
  1. When you found a good company with moat. If you have no idea on it, you may want to read this, and this article to understand the moat and franchise value.
  2. Make sure you read the financial statement and perform on the said company. I prefer company that able to make profit with posivitive operating cash flow, paying dividend with dividend yield higher than FD rate, High ROIC (compare with the peer), and a strong balance sheet with low or no debt - preferable Net Cash company.
  3. Check if there is a price value divergence based on historical value. I like to use this worksheet to inspect the price value divergence by inspecting the EV and EY with the magic formula. 
  4. Or, when there is a huge Margin of Safety (> 30%) between the stock price vs its intrinsic value. There are several methods to determine the intrinsic value
  5. I like to invest in good companis who is reinvest its earning for Growth CAPEX to growth its future earnings, and ultimately it will increase the company's intrinsic value. Say, a company ROE is 30%, for every $1 reinvest to the company, it is higly likely that it will able generate $0.30 per year.
  6. A good company normally is selling on a premium price and it is a good time to buy if the company experiencing an one off bad event. We can look at good companies who are trading in its 1 year or 3 year low, and we can earn a good profit if the company able to recover to it former glory days.  
After that, we have to think when should we click the sell button?  I have summarized Mr. Chong idea on this post. And, I would agree it is a good checklist for us. 


Happy hunting!

You may interest to view my writeup on Financial Statement Analysis template to help you to kick start for your hunting:-
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