View the article online at http://citywire.co.uk/money/article/a635431
Diary of a Dumb Investor: formulas to make me rich
Enough novice winging it. I’m getting my calculator out to upgrade my much-maligned investment process.
Who am I? What am I really trying to achieve? What is it all for?
Those, I believe, are all questions investors like me will have asked at some point.
More specifically, I feel the need to ask: am I a ‘value’ or ‘growth’ investor?
Even as I ask that question I don’t know if the answer matters, but I’m trying to make some sense of my much-maligned investment process.
I guess I’ve been a ‘growth’ man. That is, by my understanding, I’ve been chasing companies that look good by my reckoning, based on a bit of analysis of their offering, the environment they’re working in, how they have done in the past and so on. Nothing too number-y. Shooting from the hip.
My portfolio: Click to enlarge
But I feel I somehow would be, I don’t know, more proper if I became a ‘value’ investor. This, I believe, means someone who uses ratios and stuff to work out whether a share is cheap relative to its prospects. The dull, mathematical – but admirably systematic – sort. Like Citywire’s Smart Investor.
If I want to leave the by-the-seat-of-their-pants growth crowd and join the value nerd crew, I’ll need a calculator and some ratios. I’ve been using some of these to evaluate shares, but kind of fudging it. So I’ve been spending lots of time on Google, Investopedia and Citywire to try and make sense of all the Es and Ps and PEGs and EPSs.
Basically – because the more you look into this, the more complicated it becomes – I gather that you need several ratios to work out whether a company is cheap. No single one on its own is trustworthy.
So you start with earnings per share. Literally how much bang you get for your buck. Or pound as it were.
With this you can generate the classic P/E ratio (or more likely look it up online). This is how much you are paying for earnings (AKA profits) and the lower the better in terms of value. However, you can’t take this number alone. It depends on an earnings number that could be dodgy and besides it needs to be used in comparison with other companies in your company’s sector. There’s a whole range of snazzy different EPS numbers, but what Citywire’s Smart Investor says is that you need to stick with the same one every time.
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