Different people will have different method when comes to buying a stock. Some may look at the chart and when they feel like the timing is correct, they will buy the stock with no hesitation. Others may wait for the share price to drop more before buying it so they will not be buying at a higher price, hence bigger margin of safety. However, the writer would like to discuss this topic mainly on fundamental, but differentiate it with first-level thinker and second-level thinker.
So, how should we differentiate these two types of thinker? When comes to fundamental analysis, most people tend to look at the PE ratio, one-year price range, ROE, all these basic stuff that can be searched anyway on the internet. When investors decided to invest a company merely basing on this information without any deep thoughts, is what we called a first-level thinker. These investors are just looking at data itself, and if a stock is undervalued, they will invest. However, this does not mean that first-level thinkers are wrong, absolutely not.
Let’s take a look on will second-level thinker do before they start investing into a business. Notice the writer use business rather than stock here? Exactly, they will only be looking at the business but not any share price, target price or cut loss point. Obviously, they will also be looking at information like ROE, profit margin and dividends, but all these may just be their first step of filtering the stocks. They will further investigate into the business and management. When reading annual report, they will emphasize on what the management team said and mentioned, and did they complete the milestones they have set years before. Furthermore, is their business sustainable in the future? Will the business deteriorate over time, and slowly become unprofitable? These are one of the few things that second-level thinkers will be thinking of.
Furthermore, they will not be satisfied with the information that can only be searched online. If possible, they will contact their friends or acquaintances that are being involved in this particular business segment and let them talk about the business. Since they are the professional in that particular field, seeking help or advices from them is the best way to acquire direct information. Besides, they will attend the company’s Annual General Meeting (AGM) if possible, and query the management team directly on their business or their future plans. This may seem tedious as there are so many to be done before investing in ONE company, but that should be how investing works, as you are investing in a company but not the market or share price itself.
In short, although first-level thinkers are able to money in the market, but it is advisable to know more about the company or the segment that you are currently investing into. Becoming a second-level thinker could be a lengthy process as there is a lot to be completed before investing, but it definitely worth the time since you will not only get to know the company, but also the entire sector.
For more EXCLUSIVE content, visit: https://www.facebook.com/InvestingKnowEverything/