Fundamental Extremism
When it comes to making good investments the stock market, there are many systems out there that you could employ. Funny names like ‘turtle’, ‘online momentum’, and ’shark’ etc. purport to give you the extra edge you need to beat the market consistently.
But if you really want to cut through all the bullshit and save your money, the only system you need might go by a much less flashy name. I would call it the ‘read the balance sheets’ method. OK that name sucks. It goes by another name too: Fundamental Analysis.
The point is, even though I know you absolutely loathe the thought of it, there is really no substitute for looking at numbers. Fortunately for you, there are only a few you really need to pay attention to, and once you familiarize yourself with them, you’ll start to really like looking at them. They’re going to make you money.
The short list of numbers you study when evaluating a potential investment may shift for you over time- you may add some, and you may put less weight on others depending on the circumstances. You will develop your own personalized system for checking balance sheets. But to start with, here’s a list of pretty good numbers on which to focus your attention. I will list them in three categories: Growth, Profitability, and Valuation.
- Growth:
- 5 yr. EPS Growth
- 5 yr. Revenue Growth
- Capital Spending Growth
- 5 yr. Projected EPS Growth
- Profitability:
- Return on Equity (ROE)
- Return on Investment (ROI)
- Profit Margin
- Valuation
- Price to Earnings Ratio (P/E)
- Price to Sales Ratio (P/S)
And that’s it. If you want to know whether a particular stock is a good investment or not, most of the work you need to do is already done if you have these numbers. More to come about how to use these numbers to ensure you’re making the right decision to buy.