fallacy of investing only in large caps

overlooked stocks

Rule of 72

Rule:

“In wanting to know for any percentage, in how many years the capital will be doubled, you bring to mind the rule of 72, which you always divide by the interest, and the result is in how many years it will be doubled. Example: When the interest is 6 percent per year, I say that one divides 72 by 6; obtaining 12, and in 12 years the capital will be doubled.”

 

In finance, the rule of 72, the rule of 70 and the rule of 69 are methods for estimating an investment's doubling time. The number in the title is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. Although scientific calculators and spreadsheet programs have functions to find the accurate doubling time, the rules are useful for mental calculations and when only a basic calculator is available.

The Sentiment Curve of Investing

Sales

- Sales (also known as revenue ) tell you the dollar amount of goods and services a company sells. This is important because what it really tells you is the amount of money being brought in as a result of the customers' desire for whatever the company is selling. It is also important, however, to know how much it costs to sell the goods and services offered by the company. This cost is called the Cost of Goods Sold.

Reason for improvement in sales
       - demand for product or services company provides increases (good observation)
       - Company is able to increase price of products/services (good observation)
       - company purchase some company or merged with some company (neutral observation).

Reason for decrease in sales
        - company might have sold some operation to other company (neutral observation).
        - demand for product or services company provides decreases (bad observation)

- growth in sales is more important than level of Sales
- if sales has gone down for one year and underlying problems are one time only and recoverable then it is OK to buy company.
- if sales has gone down for 3-4 years continuously then it is reason for worry, and you don't want to invest in company.
- compare the sales growth in the company you are researching with the growth in the industry.
- In general, sales growth of about 10% is considered good for large-cap companies. For mid-cap and small-cap companies, sales growth of over 20% is ideal.

GDP Components and GDP(%)

From nearly 80% of GDP, private consumption is now around 50% – that means more and more of our economy is dependant on the other factors: Fresh investment, Government Expenditure and Net Exports. The good thing still is that if we encourage private consumption, we will have the highest GDP impact; but our policies lead us to desire saving instead of spending.

Private consumption has been dipping and a larger amount of GDP has been as investments, or “gross capital formation”.

Return On Assets (ROA)

Retrun On Assets is a very important tool to measure what kind of return investors get on their money.
- This has a stronger effect on: 1) The cash flows to the shareholder, and 2) Whether the company has opportunities to grow going forward.
- In growth industry, company having higher ROA is better than other company in same industry. In stagnant industry this may be less useful.
- Investor often see growth in company but fail to consider cost for that growth. All companies require investments in assets in order to support growth, whether it's in the form of fixed assets, working capital, or the acquisition of other firms. The companies with the best return on assets (or return on invested capital) are the ones that reward their investors with cash, not just paper profits.