Sunday, October 12, 2008

Stock : When to Buy at What Price

This explains how I buy stock, when to buy and at what price.  And why I don't really bother global recession and market fluctuation.  Actually that is not right, I do get very excited during down turn.  Its not often you get this kind of opportunity knocking on your door.

There are a lot of reasons and fundamentals behind this method but here I will just list down the practical steps now.  Explaination to follow in future posts.

Buying a stock should be EXACTLY like starting your own business !

1. find out the historical EPS ( for the past 10 years if available )
2. determine the EPS growth rate from #1
3.  by using this EPS growth rate, forecast to future EPS ( ie.10 years later )
4.  pick a reasonable PE for your stock
5.  use PE from #4 and the future EPS from #3 to calculate the Future stock price
6.  decide a return rate you want to achieve ( ie. 15% )
7.  Backdate the future stock price in #5 to today's price using interest rate in #6
8.  decide a safety margin ( ie. 50% ) and finally you have your target buying price !

There you go, When the stock price is lower than #8, BUY !!

example :
1. EPS is 0.28 to 1.12 in past 10 years
2. so the growth rate is about 15%  ( you can use rule of 72 )
3. 10 years later, the EPS will become 4.48
4.  PE = 10 from magazine/newspaper
5.  stock price = PE x EPS = 10 x 4.48 = 44.80
6.  15% means doubling every 5 years or doubling twice in 10 years
7.  44.80 / 4 = 11.20  ( 11.20 double twice in 10 years becomes 44.80 )
8.  11.20 / 2 = 5.60

So if the stock price goes below 5.60, I will buy.


** OUT OF TRACK 思 想 出 軌 ** said...

I think it is a way to lose less and low risk and common... Is this enough in reality?
We need to know something that is unknown by others? Eg, talking to the insiders but couldnt be done by a layman unless u fake to be a reporter in the board meeting :))
A good post tho :))

Mt. said...

this post was about buying a stock using numbers to judge a business. Ideally buying a stock is to buy into a good management, just like mutual fund to a fund manager.

Buying into a lousy business with a GREAT new management brings great potential. Buying into a GREAT business with lousy managment may go downhill onward.

2nd to that is if the business has a good SYSTEM. A successful biz usually has a non-replicable system inside that makes it successful.

All these are qualitative assessment to a business.

However, this post is using quantitative way (numbers) to judge which would have include 'all' qualitative assessment in it as well.

ie. if a system can consistently maintain a great EPS growth rate, most probably someone inside (management) is doing something 'right' with a 'right' system.

if I did so much work and assessment but at the end fail to judge a 'right' business and cost me a lot of money, then I am paying for my own judgement call. Which is part of the learning process ...

Anonymous said...

Dear mic,

wat does EPS & PE means? ur calculations seem too complicated to me, do u mind to work out, for example, the RESORT share for me? I'm eyeing on IOI, KLK & RESORT... THX!

Mt. said...

EPS is Earning Per Share. If a company earns $1million this year and it has 1 million shares, then its EPS is $1

PE is Price Earning Ratio. This one is a bit more complex. Basically it says a company may worth $1million now, but the traded share is total at $2million, so its PE is 2X or 2 times of what its worth.

I am also interested in those shares, I may post my own calculated results up here once I have them but i also recommend you buy some books about 'how to value stock', or can email me for more info.

Anonymous said...

something to be careful:
1. EPS volatility in the period when you calculate the EPS growth rate. Is that a steady growth rate every year or just EPS being shoot up at the end of the period.
2. What PE to be used? really magazine or newspaper can provide a good measure? How about an industrial average PE or PE trough/peak in the past history?
3. EPS growth in the past history not necessarily to be repeated in the future, especially stocks with high growth rate in the past may peak soon. Every business has a cycle.

Mt. said...

good points ...

1. I usually draw a trend of the EPS and then use the trend line to get the growth rate. Sometimes I also use the 'lowest' growth rate

2. picking the right PE is an art. I use lowest PE for the past 10 years, review what the PE offers by the 'experts' and apply my own view on how the industry may grow the next 10 years.

3. all these calculation is to 'confirm' a 'good management'. a good management will know what to do to keep the EPS right in different business cycles.

Anonymous said...

Can you show to calculate the #2 from #1? I dun understand how to get that 15% eventhough I had tried to calculate it with Rule of 72..thanks :)

Mt. said...

0.28 double once become 0.56, double one more time become 1.12

so it double once every 5 years

72 / 5 =~ 15%