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Helping You to Analyze Value Stocks Better

Time to answer more great reader mail. One from someone who is struggling to analyze value stocks, and one from someone who is completely lost at what things to focus on as a beginner.

analyze value stocks

When you say you can help, how much would your book help me? I love the idea of your Value Trap Indicator. I am slowly becoming a more disciplined and patient investor, comfortable with averaging down and paying attention to balance sheets and cash flow, but my 8-5 is a counselor so I have limited time to research and read (with a family of 5 kids).

I have around $50K in my Roth IRA and $20K in my 401K. I would like to pickup some values in the sale that is happening in the market (I sold a large portion of my Vanguard 500 index about 3+ weeks ago in anticipation of the market downturn). Money is tight right now and I just want to make sure your book will help me with the formula to put into a spreadsheet that will. Help me analyze value stocks in a better manner. Thanks for the help, love your content.

Jay

The spreadsheet does exactly what you are looking for: a pre-calculated formula which allows you to compare value stocks. However, you have to put in the time and effort with regards to researching the stocks. There is no quick solution.

If you are already comfortable with sifting through balance sheets and cash flow statements, I’d say the book is a perfect next step to translating that data into a concrete numerical comparison. What you’ll have to do with the spreadsheet is manually fill in the common financial data points in each of the major statements (income, balance sheet, and cash flow).

The number of data points isn’t what’s time consuming, but if you are evaluating many stocks or many years the time involved can be quite liberal. I’ll tell you that when I’m evaluating a stock, I figure out if I want to buy it or not within 5-10 minutes of using the spreadsheet and the 10-k. You can easily get to this point after using the spreadsheet a couple of times.

About the reading… The book included with the spreadsheet package breaks down in extensive detail which data points are used to analyze stocks and the reasoning behind it, with historical examples to back it up. You’ll also collect valuable insight on which value stocks became the investor’s worst nightmare of a “falling knife” investment.

As always, remember the importance of dollar cost averaging, diversification, and long term investing. In perilous times such as these, the principles become that much more essential.

My biggest frustration honestly is not knowing where to begin. I have read a decent bit but I still feel like I don’t know so much….I opened my first account on Trade King but I haven’t done anything beyond that. Do I have to watch a ticker all day? Do I have to read articles about hot new companies all day? Do I have to wake up at 6 a.m. and read the paper and be there when the markets open???

–Brandon

First off, congratulations on starting your journey. Opening an account is a common first hurdle that many wanna be investors fail to do. And going with TradeKing will ensure you of lower commission fees which leads to better returns. 

If you’re struggling about where to begin, I’ll first assume you’ve already read my 7 Steps to Understanding the Stock Market guide. That online guide is the first place to begin the learning process behind how stocks work and how they are defined. It’s a starting block towards figuring out when a stock is a good buy and when it’s not.

Next, I recommend you take it a step further with my video tutorial for analyzing a company. In that video, I show the exact process I use to determine if any stock is a good buy or not. Instead of just reading about theory, this will get you the nitty gritty look at which numbers I use and how they affect the process.

Finally, you’ll want to know where to find good stock ideas. Luckily, you won’t have to read articles about hot new companies all day. Read my blog post about where to find ideas for stocks. In there I share the exact website I use to begin the stock selection process. This goes perfectly hand in hand with the video tutorial shared above.

After that, you’ll have the tools you need moving forward. It’s really that simple, and while it’s better to have more knowledge and continuing reading and growing, the nice thing is that you won’t have to spend effort learning more as long as you fully understanding the basics behind valuations and prudent value investing.

To answer your questions bluntly: No you don’t have to watch a ticker all day. This is what a long term investing strategy is for. I’ve explained over and over again why long term investing is so important, and in having such a strategy you won’t need to check the ticker price at all. It doesn’t affect you because you know you’re holding for the long run anyway. The price can move up or down and as long as you don’t sell it won’t make a difference to you.

Since we know that the market generally goes higher in the long term, we can feel confident that most of our investments should rise over the long term as well. A well diversified plan coupled with a long term mindset will allow you to not care about the ticker. Let’s be real, no one has time to refresh ticker symbols all day anyway.

You don’t have wake up at the market open for the same reason that you don’t care about the ticker. Market prices move at all times of the day, even in the after hours when a market is closed. You could technically trade at the open, but it honestly doesn’t make much of a difference when you choose to execute your trade because the prices are always moving.

Unless you have some sort of a crystal ball and know what the future prices will be, there’s no benefit to trying to time an entry point. We’re not day traders, we are long term investors. Remember that.