Saturday, December 11, 2010

What Is Your Main Investing Indicator?

I have set up a poll on the right so do participate!

Retail investors use many indicators when deciding when to buy or sell. However, there is always one indicator that they will prefer over others, when faced with a tough investing decision. The most common indicator is the Price-to-Earnings ratio which is derived by dividing share price over the latest full year earnings per share (EPS). This is also know as the trailing PE. There is also a forward PE which is derived by dividing the share price over a predicted EPS, usually taken from a consensus of analysts' estimates.

Price-to-Book or PB ratio is derived by dividing the share price over the equity per share, or NAV per share. There have been extensive studies that argue that low PB stocks will give the best returns. But in most cases, retail investors use PB ratios to assess a "margin of safety". For example, if a stock is trading at $1.00 but its equity attributable to shareholders is $2.00, its PB is 0.5 times.If this company liquidates, it can sell its assets, payoff liabilities, and still in theory return shareholders $1.00 per share. Correct me if I am wrong.

Then there are the technical indicators. For those following this blog for a long time, I am quite an idiot when it comes to technical indicators. But I do know that it is the use of numbers derived from the averages of price and volume as well as other data points. The whole idea here is that the derived figures from price and volume offer insight to the direction of the market - hence oversold and overbought are some of the words used to describe a stock or market index.

The fourth choice of None might sound funny to some. Yet there are quite a few people who are part of this program unwittingly through their insurance plans. The idea behind investing at regular intervals - dollar cost averaging to some - is that the odds work in your favor eventually. It is like doubling up at the dice table. But in the stock market, you seldom lose all your capital and that you need not bet twice as much to recoup your losses. This is even a more unemotive form of investing when compared to technical indicators.

Gut feeling or spider senses as it implies, use intuition rather than any concrete number or logic. I believe that most traders and investors use this as their main indicator. Like me, they already know what they want to buy, but then to internalize the decision, they go on at lengths to write down their rationale for trading and investing, through some form of perspective or analytical lens.

How do you invest or trade?

7 comments:

  1. personally, i look at dividend yield as well as total return from a stock.

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  2. hey vagabond,

    i think looking at dividend yield is useful. I did not put that because there is a limit to the number of options available for a poll.

    That said, do you use historical yield or expected yield. meaning do you assume that the stock will continue to pay out the same amount of earnings in dividends as it did previously, or do you have some form of projection?

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  3. Hi SSP,
    I also look at dividend yield and total return of a stock and general direction of the markets.
    But I always try to be more than prepared for the sudden appearance of a "Black Swan".
    If it appears, whatever investment fund I have will be DA buying till exhausted.
    Scary way to invest?!!!
    Ha! HA!

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  4. I am not surprise that some of you may have a good laugh at it. It sounds be too simplistic to be working if you have attended any free previews on trading and investing.

    Occam's Razor in TA and FA?

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  5. There's other valuation indicators like Free Cash Flow and Enterprise Value over Free Cash Flow.

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  6. There are definitely other valuation indicators but i chose the more common ones to narrow the list.

    that said, Enterprise Value is getting more popular among the analyst type when even recommending to retail investors.

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  7. Hi SSP & Guys,

    In living life, you can make it as simple as possible or as complicated as you want.
    So is investing in the stock markets.

    "Everything should be made as simple as possible, but not simpler." ~Albert Einstein

    ReplyDelete