Everyone will definitely experience a moment of doubt at least once before they decided to press the “buy” button on the stocks of their choosing. Generally, after they buy, they immediately pray for the stock price to go up and only realize their profit when they sell away their stocks at a profit. That is to sell a stock for $2/share when their buying price is $1/share.
However, this perfect scenario does not always happen and buying a stock without understanding what or why you are buying is no different from gambling in a Russian roulette. Have you ever wondered how can you possibly profit from the market the moment you press the “buy” button?
1. Understand The Business You Are Buying
It is of utmost importance that you really understand and know the business you own so you can sleep soundly at night. The best investor in the world, Warren Buffett advocates to own businesses with durable economic advantages so that they can last a very long time. This means a company with a characteristic that prevents competitors from taking your share of the market.
The first thing you might ask now is, “What? I am just a normal person. I am not a businessman so how can I understand running a company’s business?” Fret not, my dear friend. What we mean by understanding a business is not that you must know the complexity and mechanics of the company’s business and products.
You can start from your circle of daily activities to identify the business you are familiar with. You can gain some ideas by asking these questions, “What do you work as? What are you good at? What are your hobbies?” By at least investing in companies that you are familiar with, you gain an exclusive advantage against other investors out there because you will have the conviction and confidence in your choice that no one else has.
2. Identify Healthy Balance Sheet
Not only that, is it even more important that you invest in a company with good financial report card. Where can you find this report card? The balance sheet is the financial health of a company. We want to own businesses with huge assets and low liabilities. The difference between assets and liabilities will belong to the shareholders. Always follow this formula, “Assets – Liabilities = Equity” A company with low debt and quality assets (less goodwill) are far more superior than companies that requires borrowings to operate.
It’s like marrying someone who is handsome, pretty and owns a big nice car but they are loaded with debts and are actually sick in health. It’s a rather bad analogy of advocating gold diggers which is certainly not our intention here but you get the idea. Always remember to check the financial health of the company that you want to invest in by scouring through their balance sheet with a magnifying glass.
3. Cash Is King!
Among the assets, we want to own companies with majority of their assets as cash and cash equivalents, this means that the cash per share value is high. When there is a mispricing in the market during crisis, some companies’ fundamentals have not deteriorated but are affected due to “market noise”. If the price falls below the company’s cash per share value, that is when you know you will profit the moment you buy because you are now owning, although partly, the cold hard cash of the company in the bank!
Not only that, when there is market crisis or a slowdown in the economy, the company that we invested in won’t be severely affected because they have loads of cash to back them up and keep them running. Our company can conduct a share buyback activity in order to reward us, the shareholders. If not, our company can still continue to reward us by distributing dividends to us.
As a summary, firstly, always know the company that you want to own and be familiar with their operations. Make sure you know that they have durable economic advantages for many years to come. Secondly and thirdly, screen through their financials for a healthy balance sheet and with huge cash value per share. When there is a market crisis and price falls below the cash per share, you will profit at the moment you press the “buy” button.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.
This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.