Friday, 25 December 2015

Your New Year’s Resolution: Progressing from the Obvious to the Extraordinary

The time for making resolutions is here again. There is a psychological reason why most people find it hard to live up to the resolutions they make. Just making resolutions doesn’t guarantee that you will follow them. Resolutions have to be backed by a detailed plan of how you are going to follow them. The plan should have a means of measuring your progress as well. Also, it’s better that you have just one resolution in the live state at a time. Trying to follow multiple resolutions is a recipe for failure.

So, what’s that one resolution that you can make this New Year as far as investing is concerned? The one resolution that you can make is to make yourself financially literate. Financial literacy doesn’t mean just knowing about the investment avenues that are out there. It means seeking true investment wisdom. Like most things, the best answers are not available to you readily; they are to be explored. In fact, when you start on the journey of financial literacy, you will first find ordinary answers, the ones that the financial community wants you to know. True investment wisdom will be hidden, and you will have to search for it. Don’t fall prey to what you see readily. The obvious is just a stepping stone to reach the extraordinary, so don’t stop at the obvious itself.

How do you reach the extraordinary? By reading works of the people who are extraordinary. What your financial advisor tells you or what you see on television or what gets printed in newspapers isn’t the extraordinary; that’s the obvious. Here is a short list of the books that you can begin your financial-literacy journey with. After you have read these books, don’t stop. Keep exploring new resources. That’s how you will progress from the obvious to the extraordinary.

Rich Dad Poor Dad by Robert T. Kiyosaki
One Up on Wall Street by Peter Lynch
The $100 Startup by Chris Guillebeau
The Secrets of the Millionaire Mind by T. Harv Eker
Increase Your Financial IQ by Robert T. Kiyosaki
The Art of Thinking Clearly by Rolf Dobelli
What Works on Wall Street by James P. O'Shaughnessy 

Friday, 11 December 2015

Stock Price: The Most Important Stock Parameter

From the debt–equity ratio to the interest-coverage ratio, from cash flows to operating profit, traditionally, analysis of stocks has entailed myriad parameters. Stock analysts have their pet parameters against which they try to evaluate stocks. Indeed, one of the greatest quests in the stock market is to find a parameter or a combination of parameters that can find winning stocks most precisely. Unfortunately, no one has found one yet, though many people may claim they have. In my view, the most important parameter has always been there in front of us: the stock price.

Many seasoned investors may be amazed at the last statement. How can stock price be most important? Stock price is most important because your profits (and losses) in the market are governed by it. If you buy a stock at 100 units and sell it at 200 units, you make a profit of 100 units because the stock price reached the level of 200 units. If it had sunk to 50 units, you would have lost 50 percent of your money. So, you win or lose because of this “insignificant” thing called the stock price.

Still confused? To put it simply, in order to succeed at stock investing, it's important that you follow a strategy that is directly linked to the stock price. Ask yourself: What causes the stock price to go up? Then craft a strategy around this. Stock Market Investing for Employees discusses the EPS approach, which is based on the notion of the stock price. The approach says that the companies that grow their earnings at a reasonable rate over time see their stock prices moving upward.

A complete disregard to what causes the stock price to move and focusing on other distantly-related parameters will only prolong your quest for profits. The fundamental analyst is so engrossed in his own paraphernalia of tools that the stock price is the last thing that comes to his mind. The value investor turns a blind eye to the stock price as well. For him intrinsic value is more important than what the stock price is reacting to. Many investors are willing to sit over low to negative returns for years just because they prefer some other “magical” formula. Perhaps a technical analyst is more astute because much of his analysis is based on the stock price.

The conclusion is that no matter what strategy you follow, just see how well it relates to the stock price. If the relation is tenuous, profits may evade you for long. If the link is clear, you are very likely to make money.