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Thursday, 02.09.2012 |
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| The Little Book That Beats the Market |
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Product Details
Notes
U.S. government bonds pay about 6% over 10 years with no risk
so any investment you make needs to earn more than 6% if there's any risk
buying a share entitles you to a portion of the company's future earnings
estimate future earnings and divide by stock price and try to get more than 6%
stock prices vary wildly over short periods of time even though the value doesn't
generally buy at a big discount from the estimated value as a margin of safety
but really, as an individual you don't know the true value at all
get earnings from the income statement, the percent return is the earnings yield
return on capital - percent yearly earnings from an initial company investment
buy good companies that have a high return on capital
and look for bargain prices where there's a high earnings yield
rank the top 3500 companies by earnings yield and return on capital
add the ranking for each criteria and take the best combined rankings
this long term investment strategy can underperform for many years in a row
a good business can invest profits back into the company, increasing earnings
companies need to have a barrier to entry, an advantage over new competitors
in the short term the market may fluctuate, in the long term the value will be fair
this is basically value investing, a simpler version of what Warren Buffet does
the hardest part is predicting future earnings and future performance
average people shouldn't try to beat professionals at predicting the future
but you can use a solid overall strategy with many stocks that performs decent
if you really know how to value companies and earnings, own fewer stocks
build a portfolio of 20-30 stocks gradually over the first year
hold each stock for a year, sell winners slightly late and losers early for taxes
magicformulainvesting.com gives you stock picks if you submit your email
for trading small capital, use foliofn.com, buyandhold.com, or scottrade.com
use a minimum Return on Assets (ROA) of 25%
select the stocks with lowest Price/Earnings (P/E) ratio
eliminate all utilities and financial stocks (mutual funds, banks, insurance)
eliminate all foreign companies (suffix of ADR - American Depository Receipt)
if a stock has a very low P/E ratio (5 or less), maybe an unusual year, eliminate
try this formula with fake trades and slowly gain experience for the long term |
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