Investing

What is the most important quality of a stock you intend to buy?

Many readers of my articles often asked me for my advice or opinion of the shares they have bought. As you know, I am not a professional and it is impossible for me to know so many shares to be able to advise or express my opinion.

How can I help them when they seek my help?

From my years of share investment, I have learned some important lessons. Most investors including fund managers consider P/E ratio and NTA important. Very often, shares selling at single digit P/E ratio and strong NTA cannot perform. You must bear in mind that the P/E ratio is based on the earning of last year. Moreover, the company is not giving you the cash which is shown in its healthy account and its NTA.

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What will happen if the company makes less profit this year than last year? The share price will drop, you will lose money and lose the opportunity to make money if you knew how to select a better share to buy.

Another phenomenon, I learned about buying a low P/E stock is that it can continue to sell at low P/E for a long time. Don’t waste your time and opportunity to buy this type of shares. The price will remain cheap if it continues to make same amount of profit year after year.

To reduce the inherent risk to a minimum, you must know the company very well. It is like choosing a girl to be your wife. It takes many years to know the girl well enough before you dare to make marriage commitment. As you know, more often than not, many short gun marriages end up in devoice court.

Before I am willing to risk my money to buy any share, I do not just look at the P/E ratio and NTA. If I rash to buy it, it is like a short gun marriage. I must study the history of the company and make sure the company can make more profit this year than last year and it will make more profit next year than this year.

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If you have the ability to identify companies that can make increasing more profit in the next few years, you can be sure to make a lot more profit than ordinary investors.

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