Buffettology: The Best Time To Buy A Stock

The best time to buy a company is when it's in trouble.

"The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table."

As value investors we stalk the stock market like vultures to spot injured prey. Value investing is based on buying equity of sound businesses, trading below its intrinsic value. Our goal is to buy wonderful companies at fantastic prices.

Finding value bargains aren’t easy, especially not in today’s bull market. Although it might be tough, it isn’t impossible. Even if the stock market is overpriced, there will always be a few gems yet to be discovered.

Stocks can be undervalued by the market for a variety of reasons, may it be political or geographical pressures, natural disasters, fraud or scandals. The secret is to identify the strong companies suffering temporary trouble. The most sufficient way to distinguish between a company facing temporary pressure and a company who is heading for bankruptcy is by fundamentally analysing a company by dissecting and examining every part of the business.

Using Fundamental Analysis to Determine the Health of a Company

STRIDE fundamentally analyses companies by combining a variety of metrics. Companies are rated on strength, timing, intrinsic value, dividends and earning predictability. These metric are combined to form a blended score, which clearly states whether the business is a buy, a hold or a sell.

Working with intelligent stock picking software can make life much easier for any investor. Some investors prefer doing it manually. Analysing the fundamentals of a security isn’t an easy job and takes a lot of time, focus and determination.

Some of the metrics Warren Buffet has been using for years to pick his stocks are:

  • Return on equity
  • Debt-to-equity ratio
  • Price-to-earnings ratio
  • Price-to-book ratio
  • Forward price-to-earnings ratio

A strong company would be one showing high percentages potential future growth, have a P/B ratio of more than 1, a debt-to-equity ratio of less than 1 and return on equity percentage higher than 15%. The formulas of these metrics can be found in a previous blog that I wrote: “Buffettology: Investment Advice from the 2nd Richest Man Alive”

The fundamentals of a company serves as its immune system. When a business finds itself on the operating table, you need those fundamentals to be strong, so that the business will be able to recover from its surgery. Without those fundamentals in place, a company won’t be able to recover and eventually cease to exist. This analogy emphasizes the importance of fundamental analysis when selecting stocks.

Why Fundamental Analysis is So Important in the Valuation Process

Many investors do not adhere to the same principles as value investors. It has been said that the value investing strategy is boring. I don’t know about you, but I certainly don’t find earning market-beating returns boring.

Other investing strategies don’t regard fundamental analysis as important when selecting stock. They much rather prefer using technical analysis. The popularity and price movement of the business is far more important to these type of investors than the strength of its fundamentals.

It is these investors that find themselves selling off their stock at a loss as soon as market pressure sticks its head out. They might be holding a great value stock without even realizing it. With the approach of a growth investor you would sell your stock as soon as it faces temporary trouble, because they only invest in stocks with upward price movements.

By ignoring the value of a stock, you might be forfeiting shares that would have made you millions. If you apply fundamental analysis correctly and invest in sound companies your holding period should be forever, unless something drastically changes in the fundamentals of the businesses you are holding.

Benefit from Market Fluctuation

Market fluctuation is a perfectly natural occurrence, but incredibly stressful for the majority of investors who sells shares as soon as the market takes a downturn. As a value investor I get excited when other investors panic-sell their shares, because it delivers so many wonderful buying opportunities. When investors panic-sell, we buy, but only if the companies’ fundamentals are intact and the price is right. If you are investing based on hard facts, you can only benefit from others’ emotional decisions.

Take a contrarian approach - be greedy when others are fearful and fearful when others are greedy.

Featured image has been altered. Photo credit: The Pondering Moose via photopin cc

Topics: Buffettology


3D Value Investing: Triangulating The Best Investment Targets

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