Entering into the stock market can be scary, exciting and confusing. Thankfully Roger Montgomery, author of Value Able, has popped into Open House to help out beginner investors get a grip on stock exchange and keep their cool despite the tumultuous nature of the market.
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First things first, how do we know what a good stock or business to invest in is? Roger says look for a high quality business that is “undeservedly cheap”, one key indicator of these businesses is their return on incremental equity. He has deduced a formula to help you decide what company to invest in; return of equity divided by the return you want (based on your perceived value of the business) all multiplied by how much equity is on the bank account. When it comes to buying the stock, be aware of the level of demand and how that is affecting the price of the stock; if thousands of people are rallying for the stock, the price will undoubtedly go above what it is worth, for the value investor it is better for you to “zip up your wallet and wait.”
Do not fear! There is no such thing as a missed bargain, the nature of the stock market is that it is dynamic so there will always be another valuable opportunity coming your way. Most of the people in the stock market are irrational with money and act emotionally. A lot of people buy and sell shares according to events that have no bearings on their own business, causing the market to boom and slump continuously. Roger’s book Value Able, has everything that you need to know to enter the tumultuous stock market.
For those needing some direction, what to invest and what markets are growing, Roger gave some tips. The health sector, especially health enhancing machinery for the aging baby boomer generation and hospital improvements, communications and data storage (mainly telecommunications) are all areas that are growing long term. Roger also warned on ethical investments, that one should be aware of where they, personally, draw the line on unethical business investments.
In conclusion, do your homework before buying, it’s not that hard to do. Roger Montgomery left with the words, “businesses with high rates of return on equity, little or no debt, wait for the cheap prices.”