Asked if he would ask for investment advice from a stock
broker Warren Buffet, currently the world’s richest man and who made his pile
through the stock market, retorted that he would no more take advice from a
broker than he would ask a barber if he needed a haircut.
The way to making money in the stock market has been
demystified by this one man. Through applying the principles of professor
Benjamin Graham his genius outperformed the Dow Jones by a stunning margin all
through and through. It doesn’t take profound intellect; it’s more of character
genius orchestrating a few simple benchmarks.
This is the way to making a pile in the stock market. These
are the yardsticks to use when picking a stock:
1.
Earnings per share.
This is found by
dividing the total earnings of the company with the total number of outstanding
shares. A high earning per
share indicates that the company is giving more
return on the capital invested and its future
prospects are attractive. The
market will thus
value it as a company likely to grow and the share
price will
rise.
2.
Price to Earnings (P/E) ratio.
This is calculated by dividing the current price of the
company’s stock with the earning per share and serves to give the same
indicator as the earnings per share. As a general rule of the thumb a very low
P/E ratio might point to an undervalued stock while a high one might point to
an overvalued stock. However, other factors come into play like the area of
specialization of the company. A historic look at the P/E might also help
decide whether a stock is likely to appreciate or depreciate. If a company has
had a P/E ratio of 50 in the past and currently is at 12 then it could mean
that things can only look up.
On the same note it is prudent to take into account that a
high P/E could portend the market forecasting a company’s growth.
3. Price to
book value.
This is a measure of the market capitalization of the
company to its book value of the latest quarter. It helps in deciding whether a
company is undervalued or overvalued.
4. Other important
variables to look at include the company’s top
management and its management
style, the growth prospects, the intellectual capital in form of the cadre of
employees it has. Warren Buffet tends to look at these factors and at some of
his decisions were influenced with whether the CEO is a heavy drinker or not.
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