How to pick a stock ??? May be We are late for this financial year, but there is another financial year ..Experience is the best teacher !!!

This data is from my understanding --- The Little Book that BEATS the MARKET .. by Joel GreenBlatt
The basic aim in investing a stock is to earn money. So if in a given time, If you are unable to beat the interest rates provided by banks,securities etc... then investing in stocks is useless. Loss in a stock means earning interest rate of less than

Actually this book generalizes the market and it does not pertain to Indian Stock Market..

Ch#2 -- Principal -- Hot air Rises.
Explanation :- Whenever a ballon is filled with hot air, it rises a lot i.e., whenever some hot topic is raised about a share it's price raises. Bag that oppurtunity.

Ch#3 -- Net Income of the company (Nc)  =  Total Earnings - Total Expenditure(includes all )

Nc can be got from the balance sheet of the company.

No of shares of company outstanding in the market   Ns...

Nc/Ns = Money Earn't by each share (Ms).

P = Price at which share was bought.

Ms/P % =Earnings Yield (Ey) . Percentage of Money made by each share.

Ey > 10% which is now the market interest rate that is prevailing in Indian Economy.

P = Upper limit of P which can be afforded is got from Ey>10%

By how much percent P is more than 10% is the safety margin. It's better to have more safety margin. Lets rank on safety margin and call it SMR.

Ch#4:-  The Upper given data is calculated on previous year's balance sheet of the company.
But what about future of the business ???

so be ready to predict the future of the business and also about Mr.Market (Stock market trends).

Return on Capital (Rc) should be more. Rc = Net Profit (Nc) / Initial Investment (Iinv)
Rc should me as more as possible.

Ch#5 :- So a business is called good business if Rc and Ey are high.

Ch#6 :- Rank all listed companies in the exchange depending upon Rc and Ey. Then,Make a database on both the rankings at the start of financial year and calculate the average of the rankings. Chose the one which has better rank as best business. Here I introduce a new term Rank for our benefit. Selection of stocks by Rank has made losses in the years 1990, 2000 and 2002 but in the rest made profits. You know what I mean by loss (earning interest less than the prevailing Bank's Interest etc)

Mr.Benjamin Grahim -- I suppose his methods were adopted for investing in shares by Mr.Warren Buffet (God of Investment) ,incidentally second richest in the world.

Grahim's Principle :- Buy stocks of Business which has good Rank at Bargain Prices (Bp).
Bp the price which is less than the Net Liquidation Value (Nlv)
Nlv :- The amount remaining for the company after clearing of all debts and selling all assests.

Ch#7 :- The above discussed method is called Magic Formula. This method more dominatingly on markets with high capitalization and having large no of shares.
So Capitalization (Cp) is another deciding factor.

Ch# 8 :- Performance of share or any investment is calculated since its inception. So Timing Mr.Market is very important. Magic Formula has worked fine if it's followed for a minimum period of 10 years. 
Belief is the key in any field. This proved worse in case it was followed for short term usually 4 years.

Ch#9 :-  Rule of Capitalism :-  If a business performs well, It will attract competition and thereby driving the profits a little down than if it was alone in the market. So the business also along with being good with fundamentals, it should have new kind of strategies, innovative thoughts,BrandName... etc to  prosper in future.

ch#10:- Company  buys back it's own stocks if it thinks it's undervalued. This is clear indication that that particular company's stock is quoting at a lower price in the market.

Ch#11 :- Don't go on with this tecnique blindly for the last year. May be last year was some extra ordinary year for the company. So analysis must be done for a normal year. Or if you are unable to make out a normal year earnings. Go for average of,for atleast 3 years.

Ch#12 :- If you don't know how to evaluate a business and project normal earnings mentioned as in ch#11, you have no business in investing in INDIVIDUAL Stocks in first place.


So discussed as above we will be needing the following fundamental or minimum factors to evaluate a business.

1. Nc
2.Ns
3.Ms
4.P
5.Ey
6.SMR
7.Rc
8.Iinv
9.Rank
10.Bp
11.Nlv
12.Cp
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