“Being known as a fundamental investor and associated with investing the Warren Buffett way, many friends would immediately jump to the conclusion that all I do is to Buy and Hold, loooong term.
I would like to clarify that there is difference between analysis and strategies. Value Investing or Fundamental Analysis is an analysis method. We study a stock from a perspective of studying a business, asking questions like how much profit can it generate, how consistent are the profits, how efficient is it, is there a competitive advantage in it products and services etc, etc. We then later determine a sensible price, which we are willing to pay for it. This is the analysis portion.
To buy and hold, is one of the strategies we can execute after doing our analysis. And it may shock you that as a fundamental investor, I have 4 different strategies that ranges from long-term buy and hold, to short-term profiting, all using fundamental analysis. Let me share with you all 4 and I hope it sheds some light.
#1: Buy, Hold and Let it Grow
This is what most people are attuned to when it comes to fundamental analysis. The purpose of this strategy is for hands off long term growth.
It is best suited for meeting long term financial needs that is more than 10 years away, such as, children’s education, retirement fund etc.
During the analysis, we look out for companies that are growing consistently with potential to continue growing for the next 10 to 20 years. There are 2 key points I look at when I am searching for stocks to execute my strategy 1.
The first thing I look at is consistent and growing Earnings Per Share (EPS). While a business can make millions each year, the profit will have to be divided by the number of shares they have issued. After dividing, the profit allocated to each share is known as Earnings Per Share. This is what is most important to the shareholders as this is ultimately what we are entitled to. So I want to see consistent and growing Earnings Per Share as this means as a shareholder, I am getting richer every year.
The second thing I look at is Return on Equity (ROE) and I want companies that have ROE that is more than15%. What does ROE mean and why is 15% the criteria?
The equity simple means the amount of cash that the company is keeping to continue to operate and grow the business. Whenever the company makes profit each year, most of them do not distribute all of it back to shareholders. Companies may issue out some, which is known as dividends, and whatever they are keeping, is kept as Equity. So since they are keeping my money, I want to know if they are making good use of it. A ROE of 15% tells me that for every $100 they are keeping, they continue to generate $15 using it. I want companies that can generate 15% or more, the higher the better, but most importantly, it must be consistent.
So for this strategy, once we can get companies with consistent, growing EPS and a high ROE, there is high chance that our wealth will grow year after year, hands free. ”
I will be sharing the other strategies in the subsequent posts.
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Mind Kinesis Research Team