The Art of Investing: Evaluating Stocks: 1 (Complete the Art of Investing) - Softcover

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The simple formula to make money is to find value stocks and wait for the market to realize their values. Only buy the market is not risky. Most successful investors are doing this. The book value of a stock is simply the net worth of a company (= Assets – Liabilities). When the stock price is higher than the book value per share (i.e,. ‘Stock Price / Book Price’ > 1), it is over-valued. When this ratio is more than 2 or less than 0.5, you have to be cautious.

When it is way under priced, there may be a critical reason. Intrinsic Value includes the intangibles such as patents. However, both the Book Value and Intrinsic Value have not been convincing as predictors to me from my tests. Briefly, describe some basic but important metrics here.

• Expected Earning Yield (E/P). The future appreciation depends on future earnings and the current price of the stock (you do not want to overpay). I prefer a range from 5% to 30%.

• Growth of Earnings and growth of sales. Compare them to their numbers in the same quarter last year. I prefer 10% or higher.

• How good is the management? Measured by ROE. I prefer 10% or higher.

• How safe it the company? Measured by ‘Debt/Equity’. I prefer less than .5 (same as 50%). However, some industries are debt intensive. These are the ratios readily available from many sites including Finviz.com except reversing P/E for earning yield.

For most cases, there is no need to dig into the complicated financial statements to start. The predictability of most metrics changes according to the current market conditions. Monitor their performance and act accordingly. I prefer E/P but Earnings/Sales had better predictability in my last test.

Size: 105 pages (6*9).
Last update: 04/2022

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