Stock Market is like Dating!

Ever invested your feelings in a girl and thought like “yepp I guess I could stop here for sometime”? (Short-term homework)

And then got home and OMG hell broke loose. You find out she is insensible and created unnnnecessary drama over something you said about one of your mutual friends, and now people wanna talk to you about something you have noooo idea you said?

Or probably (Long-term homework) hung out with a girl for weeks, began dating, became exclusive, had her say the rightest words on the planet, had her do the nicest things… BOOM over!

Stock Market is a car with a thousand rear-view mirrors the size of windshield and windshield the size of a rear-view mirror. It’s a volatile Ocean on a full moon night which takes up even the small boats when the tides are high; we think yep that one, over there, I’d like that one please. But then the tides wear off, you can’t find your boat and you find out who is swimming naked.

LOL yeppp, blue-chips go wrong… and they make everyone’s eyes blue, not in a good way.

So, lesson:-

1. Find dividend aristocrats. Its better to get something in return on a regular basis. Choose the stocks whose dividends have consistently increased.
2. Find blue-chips, but remember they are not permanent.
3. DI-FUCKING-VERSIFY. It hurts less when you have 3 more lovers to hang out with, right? Chains of habit are light than heavy when chains of habit of others is consistent for now. I mean, one stock falls, there are others that will balance it out. Unless of course you are a jerk-magnet and all of them were ill quality stocks. Then, you should probably advise people which stocks to NOT invest in. Or maybe you are investing in the same industry type. Don’t do that.

HOW TO CHOOSE A STOCK TO INVEST IN:-

1. Find out your favourite product/service’s stock name(If it’s traded).
2. Look at it’s financial statement from search engines.
3. Love it in it’s bad-times; I mean, invest in a quality stock when company has temporary trouble. (Buy low, Sell high)
4. I believe stocks that will not be affected by change(modernization, technology, globalization) are a good-call. Like, don’t invest in a company that sells fans, ACs will take over. Don’t invest in a company that sells floppy drives, u know why! Probably don’t invest in blackberry  anymore LOL. Coca Cola?
5. Maybe Facebook? But you have to keep up with their performance. Don’t hold it if something better comes along, and it becomes Myspace or Orkut or Hi5.
6. Check their quarter earnings.
7. Definitely read about any new M&A or any new business expansion. The sooner you know, sooner you can invest when the prices have not yet soared up.
8. Check balance sheets of the company you wanna invest in. Go for it signs: More assets than Liabilities, More current assets & cash than current liabilities, Debt to equity ratio should be less than 1, 0 Preferred Stocks.
9. Check P/E Ratio, PEG Ratio.
10. I think you should keep a number-target where you just sell it off. Buy what you can afford to lose.

Read these 4 books when you get time (I haven’t yet lol) :

1.       Graham – Intelligent Investor

2.       Warren Buffet - The Essays of Warren Buffet

3.       Robert Kiyosaki – Rich Dad, Poor Dad

4.       Peter Lynch – Beating the Streets

Movies to watch :

1. Wall Street (1987)        

2. Margin Call (2011)

3. Boiler Room (2000)     (I like this one! Especially Vin Diesel & yeah Ben Affleck)

4. Trading Places (1983)

5. American Psycho (2000)

P/E RATIO OR PEG RATIO?

(Just a revision : What is P/E RATIO -> Share Price/Earning per share

PEG Ratio -> P/E Ratio/Growth Rate)

I was asked today why modern analysts give so much importance to the PEG ratio? I reckon its because as P/E Ratio, on one hand, only tells us how much an investor is willing to pay for each dollar extra earned on the investment; 

PEG Ratio, on the other hand, tells us whether the stock is over-valued or under-valued. It takes future (growth) in account.

While P/E is historical (as it judges on the earning earned and market share price), PEG Ratio is futuristic; and if you are in the markets, you must buy the future.

Although today when I was re-studying P/E Ratio and PEG Ratio, I stumbled upon some very interesting articles on the net where they have said that PEG Ratio is a silly tool. I am surprised at their arguments, nevertheless Its safe to say that PEG Ratio is a safe tool, provided you are valuing “teenager” stocks, i.e., stocks that have not matured yet and are growing.

I understand it’s a little mind-stressing as to come to the ratio, you first have to evaluate P/E Ratio… now what PE Ratio do you use? Forward or Trailing?

And then Growth Rate – forward or trailing? 1 year or more or more? And if you want to verify your ratio with other online sites, then, trust me, it’s like finding marijuana in your Lucky Strike packet of cigarettes; chances are 1:100!

So, what’s the solution? Now that is something none of the investors mentioned in their articles! Yes, perfect.. tell us this valuation tool is flawed too.. and have people run to you like you are the Intelligent Investor, or ask to subscribe to your solution booklet for $99. Well, you are a cynic finding faults in anything discovered and making money out of your cynicism. Don’t go around breaking bubbles!

The solution is instead of being in a rush to disapprove and strike out all available valuation tools, we must know why they were derived in the first place, and how to use one, especially where to! 
So, when finding PEG, take current P/E Ratio (If you don’t want to use the formula, its available on http://www.nasdaq.com/symbol/fb/pe-ratio). 

Growth Rate - Now it depends, I tend to use the 5 years one cuz it irons out the creases of time and volatility, Use this site as it gives Growth Rate for both Trailing and future 5 years http://hotstocks.mygroupmedia.com/PEG.aspx

Use the lowest future Growth rate (and EPS) than given, so you are being risk-proof.

Another thing to keep in mind is the lesser the PEG Ratio, the better. It is like ladder rungs; the higher the PEG Ratio, the further you can fall and more you can get hurt.

So, what about Stocks that have matured? With 0 growth?

The formula by Graham in 1962 for stock valuation (with adjustments):

Value = EPS x [8.5 + (2 x Growth Rate) x (4.4/5.76)]

*4.4 the rate of return used then, and divided by 5.76 is the adjustment made.

Now, we will take example of GOOG. I am taking values from the above mentioned sites:

Value = 31.91 x [8.5 + (2 x 13.45) x (4.4/5.76)]

             = $ 926

Adjustment made:

Value = 31.91 x [7 + (1.5 x 13.45) x (4.4/5.76)]

                =$ 715

(This seems more real) and GOOG is currently trading at around $556, so it is currently undervalued.

And if valuated by the basic PEG Ratio formula, even then 1.3 is a very good ratio.

PEG Ratio	P/E Ratio	Share Price	EPS	Growth Rate
1.29672324	17.4409276	556.54	31.91	13.45