How to pick good stocks.

Introduction: 2

What is an “Undervalued” stock? 2

Discovery Phase: 3
Phase 3: 3
Phase 4: 4

Basics: 4
What is a stock? 4
Investment strategies: 4
Fundamental Analysis: 4
Technical Analysis: 4
Behavioural Analysis + Social Signs: 5
Dollar Cost Averaging (DCA): 5

Active vs Passive Investing: 5

Active: 5
Passive: 5

How to find winning stocks? 5

Gathering Information: 6

Understanding financial ratios and metrics: 6

Beta: 6
Earnings per share (EPS): 6
Price to earnings ratio(P/E): 6
Price/Earnings to Growth Ratio: 7
Quick Ratio: 7
Return on Equity (ROE): 7
ROE=Net incomeAvg shareholders equity 7
Return on Assets (ROA): 7
Debt-to-Equity ratio: 8
Free Cash Flow: 8
Price to book ratio (P/B): 8
Dividends: 8

Common Stock Market Traps: 8

Introduction:
❌
1. A lot of people go for High risk- High reward strategy .
✔️
2. When you start investing, you should go for High-reward-Low risk
3. Try to go for stocks that may seem Undervalued.✔️
What is an “Undervalued” stock?
 - When you go for an undervalued stock, you believe that the market is wrong and you
think that the stock should have a higher value.

Discovery Phase:
- The discovery phase is the phase when you are looking for industries/companies
that are undervalued.
- Highly recommended that you go for an Industry that you are highly familiar with.
- Knowledge about the industry gives you an advantage over other investors. (Try to
find an upper edge over other investors)
- Use stock screeners and filter it down to the criteria that fits your requirements.

Phase 3:

- Start with the global financial outlook for the next couple of years.(Global Economy)
- Look at the national economy. Analyse the financial outlook for the next couple of
years. (National economy)
- When you follow this trend, you often learn that when you find an Undervalued
stock, it can be possible that the entire industry itself is undervalued, which might not
get you enough returns. Also try to look at the industry avg, which will help you in the
future to compare 3-5 competitors.(Industry)
- After looking at the industry average ratios and financials, try to look for companies
that are direct rivals, allowing you to compare them closely and helping you to make
a better decision. (Core competitors)
Phase 4:
Before you click on the “Buy” button, there are a few things that you still need to look at.
This includes the company’s culture, board of directors, CEO. Additionally, you could always
dig deeper into the financials (including balance sheet, statement of cash flow, income
statement and the statement of shareholders), which can be available to the company’
investor’s relations web page.

Basics:
- As mentioned earlier, go for “low risk, high rewards”
- Average Market growth per year 10% hence, the company that you invest in, should
have a minimum growth in revenue of 10%.
- Invest based on Logic
- Humans often work on emotions.
- Know the dangers of following a crowd.
- Limit your emotions, try to invest rationally.

What is a stock?
● A stock represents ownership in a publicly traded company.
● A stock is bought and sold on stock exchanges.
● Price fluctuates on demand for shares.
● Stocks and bonds are different types of investments.

A bond is when you lend money to a company. Paid off with little interest.

Investment strategies:
Fundamental Analysis:

- Typically associated with value investing.

- In search for Undervalued stocks depending on the company’s balance sheet/
income statement/cash flow statement.
- Generally on the long term outlook.

Technical Analysis:
 - Analyse trends gathered from trading activity.
- Focus on supply and demand of shares.
- Generally short term. (Not always)

Behavioural Analysis + Social Signs:

- Emphasize on the importance of human psychology and groupthink within financial

markets
- Study emotions and cognitive biases.
- Assumes many irrational factors.

Dollar Cost Averaging (DCA):

- Attempts to neutralize short term volatility.

- Can be used as a passive investment strategy.
- “Time in the market beats timing in the market” attitude.
- Downsides: Missed buying opportunities during recessions or when market goes
down.

Active vs Passive Investing:

Active:
- Conduct thorough research and use up a lot of time.
- Helps effectively identify risks.
- Attempt to beat the market
- Gives numerous short term trading opportunities (Swing trading)
- Can be costly (In terms of commission)

Passive:
- Utilize DCA(Dollar Cost averaging)
- Diversify assets in order to mitigate risks.

How to find winning stocks?

1. Focus on what you know.
2. Block outside voices/hype. (May be misleading)
3. Identify Macro trends, then focus on Micro
4. Choose 3-5 companies to analyze.
Gathering Information:
1. Block analyst reports. (read them but don’t completely rely on them)(often have
personal agenda)
2. Do not use news companies' apps. They earn most of their money from stories.
3. Use investor relations pages
4. Use screeners to filter the stocks that might interest you.
5. Read books.

Understanding financial ratios and metrics:

People don’t give enough weightage to 52 week high/low dates. These dates can help
predict social/behavioral trends that affect the price of a stock, hence you should try to find
such patterns.

Beta:
Beta is the volatility of the stock VS the overall market. (1= same as market)

Earnings per share (EPS):

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒−𝑝𝑟𝑒𝑓𝑓𝑒𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝐸𝑃𝑆 = 𝐸𝑛𝑑 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
- Indicates company growth.
- Higher EPS = greater value.
- Focus on EPS growth when buying shares

Price to earnings ratio(P/E):

𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑠
𝑃/𝐸 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
- Helps gauge valuation of a company
- High P/E= High growth anticipated by the market. (can also be overvalued)
- Low P/E= Low growth anticipated by the market. (can also be undervalued)
Price/Earnings to Growth Ratio:
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒/𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑃𝐸𝐺 = 𝐸𝑃𝑆 𝐺𝑟𝑜𝑤𝑡ℎ
- Adds to P/E by adding in expected earnings growth in the calculation.
- Accuracy dependent on accuracy of growth predictions
- Uses extrapolated earnings.
- Target PEG ratio below 1

Quick Ratio:
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠− 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜 = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
- Indicates short term liquidity
- Higher ratio = better liquidity
- Lower ratio = difficulty paying debts

Return on Equity (ROE):

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐸 = 𝐴𝑣𝑔 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑦
- Measure of profitability in regards to stockholder equity.
- ROE, best used when comparing similar companies.
- Higher ROE is generally positive. (Although not always)
1. Can also be caused by higher debt
2. Can be because of inconsistent profits.

Return on Assets (ROA):

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
- Indicates profitability in relation to total assets.
- Considers company debt
- Greatly differs among different industries.
Debt-to-Equity ratio:
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠
𝐷𝑒𝑏𝑡/𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
- Indicates company’s financial average
- How is the company Financing its operations
- Higher ratio = Higher risk

Free Cash Flow:

- Remaining cash generated after accounting for cast outflows.
- Cash remaining for the company to repay debts, dividends, interest etc.

Price to book ratio (P/B):

- Compares company’s market capitalization to book value
- P/B under 1 generally seen as potential smart investment

Dividends:
- Direct cash payment from company to shareholders.
- Typically paid quarterly.

Common Stock Market Traps:

-
-
Dividend trap→too high dividends
Relying on stock price history
🚩
- Lacking competitive advantage
- Cognitive Bias.