A book that I read about intelligent investing was written by a value investor. I will try to summarize below what I learnt about investing from this book.
The author says that we should understand the nature of markets and be disciplined while investing.We should neither get scared when the markets fall nor get too excited when the markets rise. We should not follow the herd. We should buy when others are selling in panic and sell when others are buying in anticipation of making a quick profit.
He said that we should invest in companies that are selling at a price which is less than its working capital. This means that we would be buying the company at a BARGAIN price since effectively we would be getting the fixed assets of the business for free! Not only would this provide a MARGIN OF SAFETY it would almost ensure preservation of capital and good chances for appreciation.
He also suggested that we could categorize stocks into various categories like
1. Cheap - Stocks having a P/E of less than 10.
2. Average - Stocks having a P/E between 10 and 20.
3. Expensive - Stocks having a P/E of more than 20.
He preferred to invest in stocks having a low P/E.
He suggested that we should buy stocks which have P/E less than 15 and P/BV less than 1.5.
He also suggested that we should sell the stock when it did not meet the above criteria.
He also suggested that we should hold a stock for at least 2-3 years.
I have currently invested in companies using the above method and noticed that it is a good method
to manage risk and prevent huge losses which I have incurred using other investing methods!
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