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Did any of you take advantage of the Hong Kong or US stock markets [香港美國股市]? Mainly the fact that stock prices have generally fallen over the past few weeks, but started to recover a few days ago. If not, you should start noting this so that we can start making money [賺錢]! I will be changing my blog topics a bit from now on, so that I analyse and discuss a different stock every week [分析股票]. However, before I do that, I need to introduce a very important principle today: Value Investing [價值投資].
One of the greatest investors of all time, Warren Buffett [巴菲特], uses this technique to get rich. What is this Value Investing? To put it very simply, it just means that every company has a value, and this company’s value is reflected in the stock price in theory. Lets call this the fair price. However, there are some times when a company’s stock price is a lot lower than the fair price [合理價錢]. There will be some times when a company’s stock price is higher than the fair price. Why is this? The reasons can be endless, but one easy reason to understand is that investors react (and even overreact) to different pieces of news about the company differently.
For example, lets say a company hit its profit targets [利潤達標]. That surely must be good news right? Not always! It depends on what you mean by targets. It also depends on how the rest of the world is doing. Lets say your company targeted a 5% growth in profits and it met the target, but all other companies grew by 10%. Is that good news for your company now? This is a simple example, but different investors react to news differently. Lets say inflation [通脹] was high. Unemployment rates [失業率] dropped. Economy is growing [經濟增長]. How do these factors affect your company? Who knows. Its anyone’s guess!
Ultimately, the goal is to buy shares when a company’s stock price is low, and sell it when its high. That’s the saying “Buy Low Sell High” [低買高賣]. Not as easy as it sounds though!
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Hi Xavier, can you further go on to suggest how one can calculate or estimate this fair value of a company’s share?