Approach To Investment

Good Investment is Function of Present and Past – AM

Future is never predictable. No one knows if a investment will prove good or bad.

In Layman Terms –
Profit = Present – Past

Do we see an Opportunity ?

Data is always past, never present. Opportunities are decided in present based on past data.
We have charts, graphs to showcase how an asset behaved in time.

Is Past data enough to take a decision on an Asset identifying it as an opportunity or a bad asset ?

A Clear no ! Why?

The assets in stock market are always leading or trailing in prices based on the availability and requirement basis.

Question is still there, What decides an investment opportunity ?

Will the most demanded or searched asset on google give a better benefit, or just a company balance sheet which shows 100% profit, will decide that an asset is good to be bought ?

Two Key Points to Consider –

1. Time
   Time dimension has many factors that control the stock price and need of the product and services that company offer.
   
   Timely Requirement – A pharma company that was the best seller of covid-vaccines and does not have other quality products to offer, will loose its prices once Covid is gone.
   
   Time Bound Growth A company with a patented product, its patent is going to expire in some time and the Patent will be commoditized, is a sign that the prices will fall in time.
2. Price
   Is the price of the asset practical ?
   What do we mean by practical ? – What are the values of the other assets and how are competitors of the asset performing. Is the price justifiable in the same range as it should be, is the question.
   We need to make sure, we are not part of the price bubble which eventually breaks and gives a great loss to the holders.
   How to find the correct price of a asset ?
   There are many websites that provide this data which is easy to visualize and apply. Here are some example links that can help one see this.
   https://www.annualreports.com/
   https://www.moneycontrol.com/financials/bmwindustrieslimited/balance-sheetVI
   https://www.screener.in/screens/88642/good-balance-sheet/
   Price/sales ratio
   Along with the P/E ratio, another common metric used to value stocks is the price/sales (P/S) ratio. The P/S ratio is equal to a company’s market capitalization — the total value of all outstanding shares — divided by its annual revenue. Because the P/S ratio is based on revenue instead of earnings, this metric is widely used to evaluate public companies that do not have earnings because they are not yet profitable. Stalwart companies with consistent earnings such as Walmart are rarely evaluated using the P/S ratio. Amazon (AMZN 0.38%) has a history of inconsistent earnings growth, so despite its massive size, the P/S ratio is a metric investors still prefer to use to evaluate the online retailer.
   Amazon’s market cap at the time of this writing is $1.06 trillion and its fiscal year 2022 revenue was about $514 billion. Dividing $514 billion into $1.06 trillion results in a P/S ratio for Amazon of 2.06.
   Investors who wish to compare the P/S ratios of different companies should be careful to only compare P/S ratios of companies with similar business models. Across industries, P/S ratios can vary greatly because sales volumes can vary greatly. Companies in industries with low profit margins typically need to generate high volumes of sales.
   Price/book ratio
   Another useful metric for valuing a stock or company is the price-to-book-ratio. Price is the company’s stock price and book refers to the company’s book value per share. A company’s book value is equal to its assets minus its liabilities (asset and liability numbers are found on companies’ balance sheets). A company’s book value per share is simply equal to the company’s book value divided by the number of outstanding shares.
   A company’s price-to-book ratio is only marginally useful for evaluating companies, like software tech companies, that have asset-light business models. This metric is more relevant for evaluating asset-heavy businesses, such as banks and other institutions.
   
   These are some of the factors one needs to consider before investing.
   Will come up with a cool list of sources that one can use effectively to decide whether an asset is worth, and which asset one should invest into at this time.
   
   See you in next Blog. Thanks – AM