- Sep 7, 2009
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If you really want to get good at picking individual stocks, use the same methodology as Warren Buffet: Value Investing.
Even though this methodology has outperformed all others by a wide margin, I'll admit it is boring. But it's also less risky.
Here's how it works: Value Investing is about buying a stock at a discount to it's intrinsic value. Intrinsic Value(IV) is what a stock is really worth.
For example, If WB runs the numbers and calculates a stock's IV to be $100 per share, he'll usually wait until the market price(the price you get from a broker or on the computer screen from an online brokerage) is selling somewhere near the $50 range or less.
Also, assuming that you follow this method, when your stock tanks in price(not value) during tough economic times, you have to realize that is an opportunity to buy more stock at a steeper discount.
In order for your calculations to come out right, you'll have to have a set growth rate. Mines is 15%. At that rate, my money doubles every 5 years(too bad I've only been investing for a year and a half).
The method WB uses to determine the IV is called Discounted Cash Flow(DCF). In the DCF method, IV is called Net Present Value.
DCF is a calculus-level problem.If you're not a math wiz and want to understand the method in plain spoken English and line-by-line format, pick up a copy of What Are Stocks Really Worth? by John Malloy.
I appreciate the good info/crash course. I am becoming a student of investing and the various methodology.
How frequently do you purchase stocks? Are you on a monthly cycle where you buy a certain amount each month or do you just buy periodically when you find that certain stock that meets your criteria? Do you do all of your transactions on line or do you work with a bricks and mortar type broker?
I had a buddy of mine who tried day trading for a while. He lost a significant amount of money in his first few trades that basically put him out of the game. So, in light of my past losses and the losses of my buddy, I am approaching investing very cautiously.