How to pick stock (part 5)

With the four years experience on practical gained from investing and three years of professional theory gained from CFA, I started to become more sophisticated investor.

Since year 2006, I began to set my stock picking philosophy, where I can show you here:

1. Never invest in a company that you do not understany throuroughly.

It can protect you from the begining of the investmet. There are too many so called investor whose investment period can actually less than one year or even one month or few days. This is the most dangerous risk when you started investing, as if you do not know the business that you are investing, then you will not know what is the instrinsic value inside it. For what contrast to the cut loss strategy, the more you understand the value of the company, the more you should invest in it when the price goes down. This helps me a lot espcially when the stock price goes down to my original buy price.

2.invest in strong financial status company or efficient company which is worth for long term holdings

This rule is to protect me from making a serious mistake to put a major investment into a single stock. Sometime when I think of putting a lot of money in it, I will think of future prospect of the company.

3. Buy at the reasonable price

There are few ways that we can know whether should our investment is done successfully. First, we must find out the intrinsic value. There are a lot of method to find out the intrinsic value, where I can share with you I'm another blog. Secondly, we must find out the margin of safety that we require. Take for example, when we get the intrinsic value, we could set 50% margin of safety, we can buy the stock when the stock price is less than 50% of the intrinsic value.

Based on this two, then we are able to justify the purchase price. We must always be patient to wait for the right price. Normally the right price always found in bear market, not bull market. So, I think now we can start to find out which company is worth to buy for long term.

4. Buy on the intangible asset - people and branding and system

The more I learned about the investment, the more I can make use of it to do the business. So far what I learned from there is we must have a good management team who can really help the shareholders in creating sustainable growth. I can have another blog to talk about this in detail.

5. Be nature (lately added)

This rule is just added as I learned from the Tao de ching. It teaches me that nothing is last forever, including our life, relationship, family, friends, career as well as our investment. This, we should always stay calm and rational when the market is volatile. It does not mean that we should be always contrary with others, but just don't be over react from outside. When you are earning, always prepare for the wost time, but when you are in the worst time, you should also look forward to the good time to come. I think this is the way we do business as well

After that, I can talk in detail of the financial terms, my experience of each stock, rules that I set, and finally talk about the attitude of investing.

To be Continued (part 6 - 9 financial terms) ...
To be continued (part 10 - 15 experience in each stock) ...
To be continued (part 16 - 20 rules that I set)...
To be continued (part 21 - 22 attitude of investing)...