Sunday, January 01, 2006

My Investing Journey-Reading Up 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
After that rather brief affair with CWT I resolved to learn more about share investing. Certainly I had to know how to value stocks, otherwise how was I going to know whether a stock was worth investing in?

Building up a field of knowledge from a standing start is a rather painful process, especially when you have a daytime job which takes up most of your time and energy. I checked up some books on investing but they seemed to me too abstruse and I lost interest in them after struggling to get past the strange terms (discounted cash flow, portfolio risk, capital asset pricing) used in the first few pages I started reading (I would later discover that I had been trying to read the wrong books: instead of trying to read "Investments Theory" I should have checked out "One Up On Wall Street") . A mentor would have helped a lot, and I had none.

Ultimately, it was the Internet where I found my initial best resources. Thanks to Yahoo! I located investing sites like Investopedia and The Motley Fool which were easy on clueless beginners. Thanks to these sites I realised that just as sure as there was no single valuation methodology that could scientifically determine the value of a stock (if that were so, there could be no buyer-seller spread nor any short-term price fluctuations), there was an underlying force to share prices which was the business behind the stock. And what mattered in the long-term was the value of the business and how people viewed it. So, the question changed from how to value a stock to how to value a business -- a small step, but an important one.

The second "revelation" was the existence of different schools of thought concerning share price movement: there were the fundamental school who believed in researching the intrinsic value of a business to determine whether its share was worth buying, the technical school who believed in focusing on the share's price-volume behaviour to make the decision, the momentum approach which became known as the "greater fool" theory after the dot-com crash but was highly popular during the boom, the contrarian approach which sought to zig when everybody else zagged.

The third revelation was that there was a variety of valuation rules of thumb though there was no single unifying approach, quantitative measures like P/S (price/sales), P/E (the Americans call it "earnings multiples" or just "multiples": mind-boggling to a beginner), P/NTA (I took a while to figure out what NTA meant), PEG (Peter Lynch's ratio of P/E vs Annual Growth Rate), even highly creative ones like price/eyeballs for the Internet stocks.

Some say that investing philosophy is determined by nature and in my case it was absolutely true. The moment I read about the various schools of thought I decided instinctively that fundamental analysis was the one for me, primarily because it seemed to my lazy nature that it involved less work than technical analysis which seemed to involved copious amounts of data gathering and statistical plotting (I hadn't come across Metastock then). Allied to this was the thought that underlying business value driving share price was a logical cause-effect phenomenon (actually now I think it's both ways: share price drives business performance by facilitating access to equity capital), much like the way the growing GDP of a country must raise the incomes of all its citizens. Furthermore, I decided that my Accounting skills, acquired in my final year of my degree course, would come in handy for fundamental analysis of a company which supposedly involved detailed examination of the balance sheet, P&L statement and cash flow. With all this in mind, I embarked on the search for the next stock to buy following my short affair with CWT.

(to be continued...)




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