As mentioned in my previous post, Fundamental Analysis ("FA") helps us to determine a VALUE for a particular company. Every participants of the market knows that the market is fluctuating over time. And there will be times when a particular stock will sell at very low price and sometimes, high. In fact, I think the stock market is one hell of a emotional animal. It can be extremely nice to you one day, and hurt you extremely bad the next. Let me show you an example:
Ah-Ha... Iris (0010) from the Mesdaq, one of the darling stocks, or someone even called it one of the legends (during it's top performing weeks) of our own stock market. This is the graph from its past 3 months, if I were to post the 1 year graph, it might remind many people of their sleepless nights... Anyway, see the price movement? down from 41 cents to 26 cents (36%) within weeks and recovered from it again, within weeks.. make any sense? except for the greed and fear factors?
"Buy low, sell high" has always been the ultimate and never-changing rule in order to make a profit from any transaction. The question here is, how low is low and how high is high? How do we know it won't go lower after low and not higher after high? Well, I guess nobody knows. Although there might be a slight possibility that there are some prophets or crystal ball reading psychic somewhere in the world who are able to predict future stock movement. But if they really exist, they would have been one of the richest people in the world. I haven't seen anyone in the Forbes Richest list with occupation of "prophet or fortune telling" before.
So, what can ordinary people who doesn't possess supernatural power like us do? We need to know the underlying VALUE. When the price is selling below the value, we buy; and when the price is selling above the value, we sell. With the value in mind, you can ignore all the noices in the market, like street talk, brokers' calls, whipers from the other table when you are having lunch and etc. That's why our greatest Warren Buffett has opted to make all his investment calls from his home in a small town called Omaha rather than from Wall Street (That's why he is sometimes called The Oracle of Omaha). That's because his only concern is the fundamental and business prospect of those companies. He is not worried even if those companies are suspended from trading in the stock market for 5 years.
Back to value vs price. My believe is to buy when the price is selling below the value that I have calculated for the company and to sell when the price is higher than the value. Now, this is my system. Make sense? Please feel free to use it, not a million dollar secret, and I am not going to trademark it anyway. However, the most challenging part is yet to come. And this part is what differentiate a small time investors like us (yup, including myself, for sure) from those legendary investment gurus like Warren Buffett, Charlie Munger, Benjamin Graham, Peter Lynch and etc and etc:
How to value a company?
There are a couple of methods that most analysts use, including earnings yield, growth, profitability, effective use of capital by management, asset value relative to price, discounting model, instrinsic valuation and many many more. Honestly, I am also still looking for the answers. I would like to share some of my opinion in my future blogs. Stay tuned..
P.S. the score now? 2-1..
2 points here:
1) FA let us estimate the VALUE of a share and help us make buy and sell decision
2) The richest man on earth, Bill Gates is also a follower of Buffett's investment philosophy. So we have the World 1st and 2nd richest (and many more from the Forbes List, including a few more from Asian) to support FA here. Shouldn't we, as well?
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