What works when it comes to investing? What does the research say? As British Asians become every more wealthy, they can still fall behind if they do not understand investments beyond property alone.
Here are some key things to look for when you are looking to invest in a private or a public company. The wealthier we are as a community the more we can help our own community members who are not as fortunate, and the more our voice will be heard and we can protect the values and traditions important to us.
1. Low Price to Asset Value
The principle here is that if you buy a stock trading at less than its book value (the cost it paid for its own assets) then it will eventually reach at least that value. Or stocks trading at discount to net current assets (ie cash and other assets which can be turned to cash in a year, less liabilities).
2. Low Price to Earnings
Also included in this category are high dividend yield stocks and low prices in relation to cash flow (earnings plus depreciation expenses). A popular one with Benjamin Graham and Warren Buffett but adding that they want to see growth too.
3. Directors buying own stocks
The theory is that ‘insight information’ these individuals have should afford a clue as to their quality and likely price rising.
4. A significant decline in a stock’s price
Do companies whose share price has fallen, do so because earnings have dropped and if so, do earnings revert to mean, and so therefore then see a share price rise?
5. Small market capitalization
Allowing for risk, do smaller companies outperform?
Net current asset value approach favoured by Benjamin Graham (the man who taught Warren Buffett) calls for the purchase of stocks which are priced at 66% or less of a company’s underlying current assets.
Research shows stocks with a low price to book value ratio outperform others.
Other findings are that companies selling at low price/earnings ratios often have above average dividend yields. They also retain a part of their earnings to reinvest in the business.
The bottom line is that $1m invested in the lowest price/earnings ratio companies with the lowest market cap in the US in 1969 would have increased to $29.8m by 1989.
Do poor performing stocks end up outperforming? Its counter-intuitive, yet we can all think of great examples.
The research below suggests they do well.
Make sure you learn how to invest, and teach your children. Property is not the wealth creator it used to be and jobs are not for life – not for lawyers, accountants or doctors even – favoured British Asian professions.
Alpesh B Patel
For a free online trading course visit www.alpeshpatel.com
