Value investing, stock selection is key. Value investing advocates growing together with the invested company, earning money from the company's growth and dividends, therefore it has extremely in-depth research on the invested company and industry.
How to choose stocks for value investing?
1、 Principle: Ensure the safety of funds and avoid losing money
1. Idle money investment without leverage. Value investing is a long-term investment, and the intervention in stocks is based on value. Due to the extremely unstable emotions of the market, it is difficult to guarantee buying at the lowest point, and in fact, few people can achieve it. Even a valuable stock may experience a long period of imprisonment after purchase, which is unbearable without idle money investment. Funds have a cost, there is a stop loss line, and even if you buy good stocks, you often "die before dawn".
2. Buy at a low price. Conservatively valuing and buying at attractive prices is what Buffett calls the 'safety margin'. The lower the buying price, the better, but what is a low price? The level of PB and PE does not necessarily represent the level of valuation. But if PB and PE are low, the probability of underestimation is high, and vice versa, the probability of overestimation is high. A more important indicator is the ROE return on equity. A high ROE indicates a strong profitability of the company, which can generate more profits with fewer assets. It is even better if the ROE is established with no or very little debt. Most of these enterprises are light asset enterprises, such as high-tech enterprises, talent intensive enterprises, and platform enterprises. Compared to heavy asset enterprises, they have stronger risk resistance and inflation resistance, and can generate greater profits with the same investment amount.
3. Buy company. Stocks are not a piece of paper, but a right. When you buy a portion of the shares, you own a small part of the company, which is the shareholder of the company. Value investing is treating oneself as a shareholder, so when choosing to be a shareholder of a company, one must be extremely cautious and have a thorough understanding of the company. One cannot be a "three ignorant" shareholder. So, how can this consciousness be formed? Faced with this question, Buffett said, 'If you can only buy ten shares in your lifetime, how would you choose?'?
4. Purchase companies that are familiar with the industry and have a deep understanding of it. Stocks=shareholders, shareholders cannot do it casually. If you don't understand this industry or company, what kind of shareholder should you be? It will only be 'being a shareholder'. You must be a shareholder of a company that you are familiar with and have a deep understanding of, which is what Buffett called "doing things within your own ability circle". First, you need to figure out where your "ability circle" is? The energy circle does not need to be very large, but it is important to be clear about the scope of one's ability circle, what one understands and what one does not understand? Just do what you know, you are an expert.
5. Portfolio investment. Portfolio investment can reduce non systematic risks and prevent significant fluctuations in investments. Each stock in the portfolio is carefully selected and its correlation is not significant in order to form a portfolio, for example, it cannot belong to a single sector. A combination of about ten stocks is enough, put ten or so stocks in one basket, and be optimistic about it.
2、 Two directions
1. Assess the company's past and present profitability
The reference indicators are as follows:
A、 The stock price is high or low. The historical position of the stock price;
B、估值。PB、PE、ROE;
C、 Profitability. Gross profit, net profit, ROE (preferably with minimal or no debt), profit stability, and profit growth rate;
D、 Financial indicators. Income statement: Revenue, expenses, and profit composition (main and non main revenue). Balance sheet: assets, liabilities, accounts receivable, turnover ratio, current ratio, quick ratio, asset liability ratio, depreciation and amortization of fixed assets, impairment of goodwill, etc. Cash flow statement: Operating cash flow (very important), maintaining sustained and stable growth is the best;
E. Dividend distribution. Dividends are an important part of value investment returns and need to be taken seriously.
2. Assessing the company's future sustained profitability
A、 Long term economic outlook. This is mainly judged from five aspectsMacroeconomic situation (domestic and international), scientific and technological development, population development, government policies, and social culture.
B、 Outstanding economic characteristics. The profit model, core competitiveness, and moat of a company are the so-called "unicorns".
C、 Economic concessions. The power to increase prices without losing market share. This involves industry analysis, including the internal competition situation of the industry, the situation of newly entered enterprises, the possibility of product replacement in the future, the bargaining power of enterprises towards upstream and downstream, the industry's barriers, the distribution of production capacity within the industry, the matching of production capacity and demand, and the industry's lifecycle position. Enterprises with this characteristic are all leading enterprises with high industry barriers and difficult to replace, possessing strong bargaining power over upstream (suppliers) and downstream (consumers).
D、 Economic goodwill. It is intangible assets such as brand, reputation, and the value of the product used by the buyer, rather than the production cost. Intangible assets can enable enterprises to generate profits beyond the average level on tangible assets such as factory buildings and equipment. This indicator is closely related to the level of wind ROE.
E、 management. Honesty, competence, trust, and admiration, serving shareholders.
F、 The bottleneck of enterprise development. The enterprise has a clear development strategy, a clear understanding of its development bottlenecks, and sufficient preparation to lay a solid foundation for breaking through the bottlenecks.
