The ‘magic formula for investing’ is a strategy that is based on the principles of value investing.
How does it work?
Rankings of stocks based on their fundamentals
You need to grade different companies on the basis of their size (market capitalisation), return on equity, net debt, growth ratios and more. For a beginner, selecting blue chips companies who are larger in size may be safer because of its established market position. However, they do not provide high capital returns because of its size as well. You might consider holding stocks of different industries to widen your circle of competence and it reduces risk.
Hold Your Stocks… If They’re Performing!
If you don’t feel comfortable holding the stocks for 5 years, don’t hold it for even 5 minutes. This frames your mind into the concept of investing versus speculation. This prevents an investor from committing such as being greedy (buy at peak prices) or being fearful (sell at rock bottom prices). After purchasing your stock, it requires monitoring its financial results on a quarterly basis. A holding period is determined how the company performs in its financial results and the overall change in its business dynamics.
Here are some tips to follow before choosing value investing:
- First, have an understanding of your debt situation and seek to repay your loans bearing high-interest rates. It makes sense to clear them before even thinking of investing. It’ll provide you with a peace of mind.
- Practice a frugal lifestyle by paying yourself first. Set up an emergency fund to counter miscellaneous or volatile expenses. Life might be unexpected and this fund is able to handle medical, auto repairs or other family expenses.
- Only after your emergency fund is secured, then set aside a sum of money to start your investment fund.
This formula will help you to attain a better position to kickstart your journey as a value investor.
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