October 2017 | Page 2 Of 2

4 Steps to Value a company based on Fundamental Analysis

There are 4 basic steps taken when applying fundamental analysis to a company, and these involve:-

Place the company in perspective versus the economy as a whole.
Place the company in perspective versus the industry sector it belongs to.
Evaluate the condition of the company.
Combine these results to guage the value of the company’s stock.

The Strength of the Economy as a whole

Obviously, in boom times, prices tend to be higher than in depressions. Therefore economists examine the economy as a whole as a starting point to the analysis – what is the environment in which ALL stocks exist? Is there rampant inflation? Are interest rates rising or falling? Are consumers burdened with massive debt? Is the currency exchange rate good for exports? By determining the state of the general economy, we construct a ‘frame’ within which stocks can be gauged.

Strength of the Industry Sector

Even the strongest company will fail if it’s sector is in trouble. For example, there were a large number of buggy whip makers at the turn of the last century, some possessing large cash balances, tight operations, and apparently excellent prospects. A old chestnut proclaims that ‘a weak stock in a strong sector is better than a strong stock in a weak sector’. A good recent example would be the telecom sector. Until 2000, even mediocre telecoms companies enjoyed massively overpriced stock prices. Now they have to function in the real world again, because the sector as a whole hit enormous trouble at the start of the new century.

Long term investing – How to Invest like a Buffet . . .

Long term investing is usually based on the principles of ‘fundamental analysis’, which attempts to determine whether a company’s underlying strength justifies its stock price. To begin with, a stock is a ‘share’ of a company. If you own stock in Microsoft, for example, you have a real and legal claim to a percentage of the assets of that company. The assets might include land, machinery, profits from business operations and so on. Obviously, the more stock you hold, the more of the company you own. In one sense, therefore, the value of a stock should be tied to the value of the underlying assets. In the real world, other factors come into play, including the market’s perceptions of the company’s prospects.

For example, if the tiny imaginary company XYZ Pharmaceuticals, employing just 100 people, and turning over less than $2 million a year is currently valued at $4 million, what do you think would happen to the share price if the company announced it had invented a cure for cancer? That’s right. No extra profits as yet, but suddenly the share price zooms, because the market EXPECTS bigger things in the future. This is one reason why the market is sometimes referred to as the ‘great expectation machine’.

Fundamental analysis then, is the study of a stock’s features outside of any technical analysis (moving averages, Grail Indicators etc). This might include the perceived economic prospects of a company, the general strength of an entire industry sector, and the state of a company’s financial accounts. By focusing on the various statistics in a company’s accounts (such as the P/E ratio, cashflow etc) investors believe it is possible to determine if a stock is correctly valued.

New Job? – Let’s get RICH!

Graduates, if you just got yourself a brand-spanking new FIRST REAL JOB, you are in a position to strike it rich! You are the lucky ones!

To get rich, the first thing you need to do, as soon as you start your first day of work, is go to the human resource department and get your benefits package. Somewhere in that large pile of paperwork is information on how you can begin your 401K, 403(b), or whatever retirement equivalent. Before you even collect your first paycheck, sign up to have 15%-20% of your paycheck automatically deposited into your 401K.

What did I say? Go back and read again. Yes! Begin to save 15%-20% (or MORE!) of your salary in your pre-tax retirement account immediately before you get used to seeing that money in your paycheck!

The benefits of doing this right away is that a) you’ve never seen the money, you won’t miss it b) Uncle Sam takes a much smaller bite of your money c) your money stays to work for you, not the government d) you get rich a heck of a lot faster and e) you forget about it after a month and a year later, when you receive your yearly statement, you’ll be glad you followed this advice.

You wait a few months to begin saving in your pre-tax retirement account and boy, it’s a lot harder to see that large chunk of money go. It’s so much harder in fact that most people never get around to saving for their retirement, thus they waste all their money and have to rely on Social Security for their retirement and they never build wealth for themselves. Don’t be like them.

Why am I recommending 15%-20% when most financial advisors recommend 10%? Because when you are a brand new graduate, the difference between saving 10% and 20% is nothing since you’ve never seen your first honest paycheck. You can save 20% without EVER knowing what it feels like to save less and see more in your paycheck. As a frugal living new graduate, you also have the skills and mentality to live on a smaller paycheck. Within a year, however, you will see a HUGE nest egg growing in your 401K. And if you save 20% in your pre-tax retirement account…you will be one of the very few, truly wealthy people who can afford to retire early.

Think about that before you say, “I’ll do this later.”

Living on a Budget Your First Year in College

College is such an adjustment. Not only do you have the first year of college classes to plan for but you also have the adjustment of college dorm life, parties every night, roommate issues and so much more. You don’t want to fail but you will find it hard to succeed at times, if you aren’t prepared for everything.

One of the things that a college freshman must do, if they live away from home, is plan a budget to live on while attending school. Most college freshman never even think about this until they go away to school and suddenly they realize they can’t just run into the kitchen anymore and ask mom or dad for twenty bucks. This little fact will often come to mind when most college freshman hit broke for the first time.

In order to avoid the broke factor, you need to plan ahead for the rainy day that will have you feeling uneasy. You need to develop a budget.

If you are lucky enough to have your parents footing the bill for college and recognize the fact that your parents don’t want you working your way through college, you can discuss your college budget with your parents. What may come as a surprise to you will be the fact that your parents will pay for books, school and a meal ticket but no more than $20 or $40 will be sent to you for a week’s allowance. If this isn’t enough, and it probably won’t be, then you need to find a job.

A great place to work when you are in college, is on campus in one of the student-oriented jobs available on campus. You might want to work in the student book store or in the food court on campus or somewhere else on campus. The reasons these jobs work well for students, of course, is because of the fact the college will work around your class schedule.

Many college students will also get a job waiting tables. However, if you are going to do this then it would probably be a good idea to restrict your work schedule to weekends. You will also have to be careful not to get too involved with the mix of employees who often run around after work until all hours of the night and morning. Remember, keep your studies in focus and work only for a little extra spending money.

If you are lucky enough to have parents who will pay you an allowance, then you probably want to negotiate for so much every two weeks. Don’t be tempted to get this allowance for the entire month because in a weaker moment, you may find that you spend your entire budget in one day shopping or partying. Have your parents deposit the money into a front-load credit card or into your bank account every two weeks and learn how to budget the money they send you.

As a college student, plan to budget your allowance for school supplies, the occasional outing with friends, pizza night and other activities as well as gasoline and other necessities for your automobile. You will be surprised at how quickly you will need to learn to budget when you live on your own.

College students don’t plan for a quick need for a budget because they don’t think about it before heading off to school. However, before you know it, you will have the strong need for a budget and you will need to take care of your money. So take the time to set a budget you can live by while you are in college.