Tuesday, November 10, 2009

Buying stocks based on price and value

Warren Buffett said, "Price is what you pay. Value is what you get."

Sun Tzu said, "The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand."

That is why I always based on price and value and do my own calculation before buying stock See below for the formula that help me to know when to buy stock.


Price is the current price of the stock.

Value can be capital increase or dividend given from the stock. It will be very hard to estimate the capital increase of the stock, but it is easy to identify which are the stocks that are giving regular dividends. I always look for stocks with good fundamentals that give regular dividend even during the recession time. These stocks normally go up and down at a slow rate which is what I like. To me it works like fixed deposit. Click here if you are interested in my choice of stocks/ETFs.

Target return is the minimum amount of return you want to see when you invest in a stock. For example, if you set it at 5%, then every year you will expect to get 5% return from your stock. I will only buy a particular stock when the result of the formula is greater than my target return.

Example 1:
If a stock is giving dividend of $0.05 per year and the current price is $2, then the return will be 2.5%. So if my target return is 5%, I will not buy this stock at the current price.

Example 2:
If a stock is giving dividend of $0.1 per year and the price is $1.00, then the return will be 10%. So if my target return is 5%, I will definitely buy this stock at the current price.

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