Friday, August 17, 2007

How Should a Fresh Graduate Start to Invest in Stock Markets

by klse.8k
Translated by Felix Leong
[Link to original article (Simplified Chinese)]

Students who had just graduated from university often lacked the capital and experience needed in investing, especially the case with experience which plays an important role in investing. Therefore, my advice to them are:

  1. Get a job first, earn your living and accumulate capital and experience at the same time
  2. Don't waste money unnecessarily, so that you can accumulate some money to be used for investments purposes as soon as possible
  3. Do not borrow to invest, you must use your own money to invest. And that the amount invested must be the amount that you are capable to bear in case you lose everything in your investments, this is the volume which you need to take control of.
  4. Find some books on finances, so that you'll be able to comprehend and analyze financial reports. Also, find a couple of books on the stock market, so that you'll be able to understand some financial jargons
  5. Practice value investing, never speculate, never think of it as a gamble, do not expect you'll become rich overnight. Investing is a marathon, not a sprint
  6. Before you start dipping yourself in the stock market you must do your homework, do not blindly enter the market: because every single cent does not come easy. A good mentality is important, never be rash or impatient.
  7. Scan through all stocks across the whole stock market, and from there search for candidates. Then lastly select the stocks that you wanted to invest from your list of candidates. Do not spread your money across too many stocks, three to five counters should be sufficient.
  8. Steps of selecting viable candidates are as follows (At every step, those that does not fulfill the requirement can be filtered out, so at each stage the number of possible candidates will decrease):
    1. The company must not bear a loss for the past five years (which therefore filter out all companies which has reported financial irregularities as well)
    2. The company must have reported increased profit every year (thus will disqualify even more candidates)
    3. Total liabilities must be less than half the holdings of share owners (i.e. debts must not be too much)
    4. Total liabilities must be less than one fifth of the year's total of net profits and reserves for deprecation (this is also to make sure that the company was not too deep in debt)
    5. Price-Earning (PE) ratio must not be larger than 25 (This recommendation is based on the situation in China, for foreign stocks I choose those not greater than 10), the lesser the better
    6. Calculate the estimated long term investment return rate, which is "Long term investment return rate = (1/PE ratio) + Average compounded earning growth rate for many years". The return rate must be greater than 25%, otherwise it must be disqualified
    7. The current stock price must not be greater than five times the net tangible asset (for foreign stocks, I chose those not greater than three times the value)
    8. The company must have a good management team with caliber (those companies that have a management personnel with bad track records must be disqualified)
    9. According to whatever the company is doing, you estimated that the profits are capable of growing for the coming years
  9. From your list of candidates only choose a few which you ranked amongst the best in your list, buy and then hold them until they no longer satisfy your fixed criteria (i.e. sell them when the time comes). Otherwise do not do anything.
The selection process above may cause you to miss a few fast growing opportunities, but it is also capable to prevent you from taking unnecessary risks. You can say that the stocks/companies which fits in the above criteria will only be a handful, but the fact that it had passed such a stringent selection makes it a good investment.

[*Translator note: It seemed that the author might not have completed the last lines of this article, since there's a dangling character "Long" in the original article. From my guess it should read among the lines of encouraging long term investment, which it is capable to generate greater returns in the long run. But of course, that's just my speculation]

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