Wednesday, October 10, 2007

Short Follow Up

I'm feeling better today. I busted out my books this morning and did some review of the formula that I use for investing. The point of the formula is that it prides itself on its simplicity. The goal isn't to try to figure out all the trends and predict how specific occurrences in the market will effect certain stocks, but rather to make the process as easy as possible while still producing gains that beat the market average. The idea is based off of a combined approach of Benjamin Graham and Warren Buffet. You figure out the value of a company by taking the amount of assets and debt to determine it's actual per share value. Then, based off of last year's return on assets, you determine how good of a job it is doing with it's money. Each validation is used to give the stock a numerical rating out of the total subset that is measured. The stocks that have the lowest ratings based on the combination of the two scores are the better stocks to invest in. Another thing is that over a three year period you'll get a return that averages 30% or so, but 2 out of the 3 years could be terrible and then the following year be great.

I still need to learn the terminology better as well as learn how to do the financial analysis myself instead of relying completely on a computer's output. That way I'll start to understand the flow of money in a business. When you can read a financial statement it's a big confidence boost and you have a much better idea of what is going on inside a company.

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