stock chart ASX stricter IPOs

The folly of using share price graphs in investment decisions

The share price graph is one of the most used tools in company analysis. Whether consciously or sub-consciously it undoubtedly always plays a part. Ask yourself if you’ve ever thought or heard someone use these phrases:

“The share price has rallied hard this month so we’ve missed out” or,

“The share price has doubled this year so it must be a good business”, or

“The share price has seen steady decline all year so I wouldn’t touch it with a 10 foot pole”.

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Importance of Valuation

Why Company Valuation is a Critical Step in your Investment Process

It’s easy to find good listed businesses; the ASX is full of them. The challenge is buying them at the right time. And I’m not talking about trying to time the market – that is a fool’s game. But buying these excellent companies when their valuation is favourable is the key to good investing.

There are two main methods we use at Farnam to value a business: by building a discounted cash flow (DCF) and using a price to earnings (PE) multiple. A detailed explanation of each is beyond the scope of this article, but briefly, a DCF values the business based on future expected earnings discounted to the net present value, and the PE takes the current multiple the stock trades on and compares it to a group of industry peers.

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searching for investment ideas

Where to find investment ideas for your DIY portfolio

 

As a beginning investor, it may seem daunting as you start to build a portfolio. You have some money that you want to invest but you don’t want to put all your eggs in one basket. So you decide to find a handful of companies and diversify.

Good companies are everywhere. Some you will see in the world daily – like Dominoes or the Banks. But many good companies can go unnoticed by those who are not looking. Equally, just because a company is large and well-known, does not automatically qualify them for an investment.

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