2 minute read
The writer has a bachelor degree in Economics from University of Warwick, UK and is a full time investor in Pakistan Stock Exchange. He tweets at @ abdulrehman0292
Stock markets are irrational and will seldom price a company correctly. Use this to your advantage. You will ask what is the value of a company? It is the sum of all the future profits the company will make and can payout to its shareholders. It’s nothing more, nothing less. You can use formulas like Price-Earnings multiple, dividend yield to estimate a fair price for a business. Buy when price is much below intrinsic value and sell when price is much above the company’s intrinsic value.
3. You only need 3-4 great investments to secure your financial future
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Here are a few examples of companies which have provided 30150x returns on your savings in the last 20 years. By investing in a portfolio of such companies, your savings would have increased by more than 30 times in 20 years.
Fauji Fertilizer 22 times
Nestle 48 times
Meezan Bank 62 times
Atlas Honda 75 times
National Foods 94 times
Mari Petroleum 155 times
No one would have been able to pick all of them but having 2-3 of them in your portfolio would have been life changing. Invest your time in understanding the business and its earning capability rather than market fluctuations, this will increase your chances of spotting a future superstar.
4. Use your competitive advantage
In investing, knowledge is your competitive advantage. Invest in industries you have know-how about. You will be able to spot trends and developments much earlier than other market participants. Rather than investing in a completely new sector, just because someone recommended it, invest in the industry you already work in. You will be able to avoid any bankruptcy/ future downturn because you already know how the business is performing in the real world. Hence, I always say “invest in what you fully understand.”
5. You only have to be right once
The best thing about the stock market is that the market may disagree with you 95% of the time and still you can make a good profit. For example, to explain through a personal example, I invested in a company (Nishat Power) in 2020, the stock did not reach its true value for 23 months but it appreciated 50% in the 24th month and I was able to make a good return.
Use stock market prices to your advantage, don’t let it dictate to you what is the underlying value of a business. The concept of “Mr.Market” is a great way of understanding the psyche of the stock market.
Mr.Market will happily offer to buy/sell your stock(s) at a particular price each day. He/she will not get disheartened if you decline his/her offer, he will always come back the next day with a new offer. Mr.Market is emotionally unstable and will offer very low prices when he is upset and offer multiple times the true value of the business when he is happy and things are looking rosy. By understanding this behaviour, and controlling your emotions, you can grow your savings handsomely.
