(The next few lessons will be based on investment approaches of Soros who is famed for his excellent performance in the market and is famously known as the man who ‘broke’ the bank of England and of course Warren Buffett whose specialty is in value investing. Soros participates in all markets, debt, currency and stocks but at a leverage hence his high average performance. )
Stock Market
A stock market is a mechanism through which company’s shares are bought and sold. Simply put, it is a public market. It is used for the trading of company stocks and securities at an agreed price through an auction process. Prices are established when buyers and sellers settle and shares exchange hands.
Methods used in analyzing the stock market
Investors use different methods of determining when to buy or sell shares. Amongst the most popular approaches are; Fundamentalists, Technical and Academics
We shall not focus on technical approach in the next few lessons because it studies market pattern and the demand and supply of stocks. Of course inarguably it has undoubted merit in trying to predict probabilities but it does not show the actual course of events. It is important that any investor should always be equipped with a proper understanding on what actually influences the price movements rather than just studying the price movements by themselves. As Buffett put it, you don’t want to be in a party, hoping to leave one second after midnight only to realize when it is too late that the clocks on the walls have no hands. In this case it equates to buying shares then realizing that they were worthless and that you actually got caught at the peak of a bubble amid the rising prices excitement. Besides, it has little theoretical foundation other than an assertion that stock prices are determined by their supply and demand and that past experience is relevant in predicting the future.
We shall also not focus much on the academic approach which is based on an assertion that prices behave in random manner and are highly unpredictable hence the random walk theory. This theory has continuously formed a justification for funds that invest in the stock index. Countless investors have disapproved this theory based on evidence of consistently outperforming the market over a very long period of time. In trying to enhance brevity in the lessons, I shall not dwell much on the subject.
Back to what shall be the subject of several subsequent lessons.
People who use the fundamentalist approach believe that stocks are supposed to have a true or fundamental value that is distinct from the current market price. The question of fundamental value varies from investor to investor and depends on one’s judgment and is therefore always subject to bias. Among the most commonly used yardsticks amongst many others developed by analysts in trying to determine valuation are; earnings, dividends, asset value, free cash flow. The weight given to each varies from investor to investor. When we will be dealing with the subject of financial analysis we will focus with the main ones that Warren Buffett successfully used and has notably always commented about just to sufficiently equip the reader in having an edge in the market.
Lesson2:Why do stocks remain overvalued for extended periods of time
Lesson 3: Illustrating How Listed Companies Operate Using Small Business model
Lesson 4: Flow of money through a business
Lesson 5: Valuing a business in terms of earnings it makes
Lesson 6: Balance Sheet & Margin of safety in a business
Lesson 7: Explanation on shares in a business
Lesson 8: Quick Basic Stock valuation Techniques
Lesson 9: Gauging Whether Company is Being Managed by Vigilant leaders
