Basic Investment Strategies

[Survival2006]

We see more and more new members on this Forum. You are all welcome. For the selfless gurus who have brought life to this vibrant forum, could you do us a favour please. There are some basic infos I feel we youngsters in the stocks need to know such as:

How long is LONG TERM?

How short is SHORT TERM?

How do the SHARES OUTSTANDING of a company affect the ratios relevant for selecting good stocks?

What should PENNY STOCKS possess to make them good pick?

Whatever question you pick up to address will surely constitute valuable basic information necessary for good stock investment to us all.

LET ME THANK YOU GREATLY IN ADVANCE.

Over to you Ken, Oseitutu, Miss Risky, Easimoni and Co.PLC::D

[oseitutu]

I am not sure I am qualified to be called upon here. There are bigger ones than me. The only thing I will like to point out is that many young participators in NSE come in wanting to be hogs instead of bears or bulls. To purchase a stock with the hope of selling it in 10 days is simply that! I would want short term to be 1-3 years, but for Nigeria sake 9 months. Anything less than that as an initial plan on entry is PIGRY. Bulls and Bears make money, Pigs get slaughtered.

One can pull out of a stock after a few weeks, but not to get into a stock with 'prayers' that it rises astronomically over a 10 day period. Such may happen and once your exit point is reached, you cash out. However I would not advocate it as a market strategy.

[eriksbmw]

Originally Posted by oseitutu

I am not sure I am qualified to be called upon here. There are bigger ones than me. The only thing I will like to point out is that many young participators in NSE come in wanting to be hogs instead of bears or bulls. To purchase a stock with the hope of selling it in 10 days is simply that! I would want short term to be 1-3 years, but for Nigeria sake 9 months. Anything less than that as an initial plan on entry is PIGRY. Bulls and Bears make money, Pigs get slaughtered.

One can pull out of a stock after a few weeks, but not to get into a stock with 'prayers' that it rises astronomically over a 10 day period. Such may happen and once your exit point is reached, you cash out. However I would not advocate it as a market strategy.

@Oseitutu

You are a very valuable resource for this forum.....but...i beg to differ on your view as stated.

Long term/short term cannot truly be defiined in absolute terms......individuals possess differing investment horizons. Stocks too possess varying horizons.

I started out with pure hard nosed analysis; seeking to make a minimum of N100,000/trade..... if that target was reached in 2 days ( unlikely though ) then so be it. Sometimes to achieve this I bought on Monday and sold on Friday.

Within a period of 6 months I was able to double my portfolio value. Don't get me wrong though....there are stocks that I've held on to for over 3 years...but...at the same time there are those that I trade consistently and it works for me and i"m sure for others too.

Key issue's are objectives, cash, and objectivity.....have your goals clear cut and stick to them with discipline.

[Curious]

I find it somewhat strange that one tries to create a standardised factor for that is purely individual and also unique per event. Long term and short term is down to what mindset the investor has. Now I think 10days is a bit tight to make decent return but in truth that is purely a personally opinion and indeed I know people who make decent returns (by their own standards) with this sort of mind set. It all depends on what you aim to achieve. If you want to make 100% return in 10 days in a market that is limited to +/-5% moves per day and has in+out transaction fees of about 5% (these days) than what you're asking for is a miracle as this is mathematically impossible to achieve ...or perhaps someone knows a way??

[c kenneths]

I think the initiator of this thred will only want our own definitions of what short or long term should be, of which I think it will depend on the individual investor.

For some people, long term means forever, never to sell even if the company is having serious trouble, and their short term will be like two years!

But for me I regard any stock I will not sell just because it gained a 50% value in a year as my long term list.

I sell some short positions stocks just to use in buying my long term stocks with the profit and repeat the cycle again.

For penny stocks, just look out for the ones with a new management with a mission to transform the company, am sure it will not be a penny stock two years later, all things being equal.

[eriksbmw]

@C Kenneths

Correct.......it all boils down to individual subjectivity.

[Miss_Risky]

Originally Posted by Survival2006

How do the SHARES OUTSTANDING of a company affect the ratios relevant for selecting good stocks?

Over to you Ken, Oseitutu, Miss Risky, Easimoni and Co.PLC:

Thanks for the mention Survival but I think you're mistaking me for Windy Wendy or someone else

Here's my two kobo worth...the proper gurus could probably explain it much better...

An outstanding share of a company is simply the share owned by an investor. So the total number of outstanding shares is equal to all the shares owned by the total number of investors/shareholders. You cannot really use the number of shares outstanding (in isolation) to determine whether a stock is good or bad. Enter Price-to-Earnings ratio….

The Price-to-Earnings (PE) ratio helps to paint a better picture of the company and to compare like for like. You calculate this by dividing the price of the share by its Earnings Per Share (EPS) for the 12 month period. For instance, if the market price of company X is N50 and its E.P.S is N1.25. That means its PE ratio is 50 ÷ 1.25 = 40. To determine whether this is a high or low PE ratio, you would need to compare it to other companies in the same sector. What’s high for one may be low for another depending on whether you believe there is potential for future growth in the stock.

Simply put, the PE ratio tells you how much you’re actually paying per Naira worth of the earnings of the company. In the example above, you would be paying 40 times the earnings of company X. Generally speaking, a low PE ratio is good (means you're paying less per naira worth of the company) but then again you need to look at the potential of the company to grow its earnings per share over the next couple of years. Here is where your question about long or short term investing needs to be answered.

Le’s assume two years on, company X has grown its Earnings Per Share to N2.50 and its share price has only gone up to N60. The Price Earnings ratio then becomes 24. Suddenly, the share looks more attractive to new entrants than it did when the price was ‘cheaper’ at N50.

Over to the real gurus to explain trailing and forward PE ratios and other factors you need to consider.

Just as an aside, funny how I'm learning about all these new fancy investment terms and yet haven't really applied them in my stock selection process. Mmmm....

[Miss_Risky]

The number of outstanding shares would affect your Earnings Per Share since you divide the earnings of the company by the total number of shares to arrive at the EPS. So in theory, the fewer the shares outstanding, the higher the EPS.

[Curious]

Miss_Risky, Perhaps the reason why you dont use these fancy concepts in your investment decision is because there is another concept that is often more powerful (at least in the short term) in driving a stocks price i.e. Sentiment

[Miss_Risky]

Originally Posted by Curious

Miss_Risky, Perhaps the reason why you dont use these fancy concepts in your investment decision is because there is another concept that is often more powerful (at least in the short term) in driving a stocks price i.e. Sentiment

Too right!!!

[c kenneths]

And who will say Miss risky is not an expert guru!

[pumping]

One other layman's way of looking at the PE ratio is to consider it the number of years it will take to get your investment back if the company's performance remains at current rates...so the smaller the value the better in general but this cannot be viewed in isolation of course...

Regarding short and long term investments I agree it varies by individual. I suppose the questions arises that since many use it in these threads it may be good to have some guidance. At least in the Naija market.

Outside Naija 3 years and less was the rule of thumb for short term investments and beyond this is considered long term. However with commision free trades awash in developed marktets these have changed and a new guide from a recent publication is listed below.

Short Term: Less than one year.
Medium Term: One through four years.
Long Term: Five years and beyond.

Term strategies are based on time and not on movement of stock. If you say I will sell my share once it increases value by 30%, without a time value associated, I don't consider this an investment strategy of any type . Also an investment strategy with plans of selling in 10 days is probably no strategy at all.

Let us define something similar to what we have above for the Nigerian market so we have a guidance when people use it on this forum. It will vary per individual but it can be our rule of thumb.

Enjoy.

Pumping