3 methods to select a Stock

There are three major steps that master investors take and they
are: 1) identify very good businesses, 2) buy them only at a huge
discount and 3) wait for the market to realize its true value or
overvalue it.

Step 1: Identify Very Good Businesses
Always remember that when you are buying a stock, you are not
buying a lottery ticket but you are buying part-ownership of a
company. If you want the value of your stock to increase over time,
you must identify and invest in very good businesses. Thus, you
must truly understand the business behind the stock. All master
investors invest from a business perspective.

What is a very good business? It is one where we can predict with
confidence that, over the long-term, it’s annual earnings and hence
stock value will increase (if a company can make increasingly
higher profits in the future, it would become more valuable). When
the value of the company increases, the stock price will eventually

While bad news and disasters like wars, recessions and new
competition will always cause the market to panic and stock prices
to plunge, a very good business is one that we are confident will
always recover and prosper after such events.

In this case, you don’t have to depend on market predictions for
your stock’s price to rise, but you are certain it will rise
because of its strong business fundamentals and earnings.

Step 2: Buy them Only At A Huge Discount

Very good companies with strong earnings, financial strength and
high growth potential are usually expensive to buy (the stock price
is overvalued). However, the market always goes through booms and
busts and there will always be short-term bad news that hits a
company (e.g the company reports lower than expected profits). It
is under these circumstances that the irrational short-term
orientated market will panic and sell the stock until its price is
way below its intrinsic value.

The master investor, knowing the true value of the stock, will buy
as much as he can at such times, thereby getting a huge ‘discount’.
He knows that the market will eventually come to its senses and
recover, correcting the stock price and bringing it up to its true
value. This is when very substantial returns are made for the
investor who is patient and confident in his purchase.

Step 3: Wait for the Market to Realize a Stock’s True Value or
Overvalue It.
Checkout more to take benefit on buying stocks…

The best time to sell is when the stock market is booming or there
is good news that makes the market overreact. Investors will flock
to buy up so much stock that the prices of all stocks rise above
their intrinsic value. When a stock is highly overvalued, it is a
good time to sell as you will make a huge profit.

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