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|How To Invest In 2021 To Get Rich In 2022 by nairaab: 10:30am On Nov 03, 2021|
How to Invest in 2021 To Get Rich In 2022
How many millionaires do you think are there in the world?
You won’t believe this number, but there are almost 47 million (46.8 million) millionaires worldwide. And guess what? 18.6 million of them are right there in the United States.
Let me give you one more shocking statistic: Every year around 700,000 people become a millionaire just in the United States alone.
It seems like becoming a millionaire isn’t as difficult as many of us are led to believe. But as we all know, it’s almost impossible to become one if you do not learn how to invest.
Most people are interested in the stock market but the problem that many people face is how to find good stocks?
How do you know if it is a good stock to buy?
People usually base their decision on the news.
If the stock is rising and it gets a lot of attention, it must be a good investment and vice versa of course. Unfortunately, that is the worst way to invest. By the time it’s out there in the news, you are probably late.
So here in this article, you will learn how to find great stocks?
How do you find stocks that will rise in value over time?
If you stick around, by the end of this article, you will learn how to analyze stocks like a professional investor.
Why do stock prices mean nothing?
Apple has a valuation of 2 trillion dollars and its stock price is traded at around $120 at the time of this write-up. But, what if I told you that, just in August of this year, Apple’s stock price was $500.
Does that mean that the company was already valued at $10 trillion, and it lost 80% of its value in the last few months? In fact, Apple’s stock price in June 2014 was $645.
Does that mean that the company was way more valuable back then? Not really! That’s why looking at the stock price is not investing!
If it already seems too confusing, don’t worry, because that’s why I am here, to simplify everything for you and turn you into a professional investor in under 10 minutes.
If you take a look at the companies that are traded in the stock market, they have a price tag, but because no one can afford that, they are broken down into many stocks.
The key question is, is this company really worth $768 billion? The answer is NO!
You see, there is a big difference between Price and value. The stock price jumps up and down every single day.
Even slightly negative news that could be fake can drive the price down, however not the value, because the value is what the company is really worth.
For example, in July 2018, Facebook’s earnings weren’t as high as some investors expected, so the stock price fell from $217 to $176.
That’s a 20 percent decline. The company lost 120 billion dollars of market cap in a single day. Does that mean the company became 20 percent smaller overnight? Of course, No! That’s why the stock price jumped back to its pre-decline level and is 32 percent higher now.
So if you want to make a good investment, you have to find out the real value of the company and then compare it to the Price that it’s traded in the market.
If it’s undervalued, it’s a good investment.
If it’s overvalued, it’s a bad investment. It is as simple as that.
In 2002, Buffett came across a company called Petrochina. After analyzing its financial statements, it was clear that this company was worth at least 100 billion dollars, but when he looked at its market cap, the company was traded at just 30 billion dollars, and based on the political climate, it was clear that oil prices would rise, he knew that it was a golden opportunity, so he invested almost 488 million dollars into this company.
Guess what happened?
The company didn’t just reach a 100 billion dollar valuation, but it skyrocketed to 275 billion dollars.
Buffett sold his stake and earned 3.6 billion dollars from this deal.
So the question is – how do you find the real value of a company?
One of the most popular methods is the P/E ratio or Price to earnings ratio.
It basically means the number of money investors is willing to pay for every dollar that the company earns. It’s a simple tool to measure if the stock is overvalued or undervalued.
Let’s say hypothetically, Apple earned 2K dollars this year and has a total number of 1000 shares. Dividing Apple earnings on the total number of shares gives us earnings per share or EPS in short.
This means Apple has earned 2 dollars for every share. To find the P/E ratio, you have to take the Price of the share, let us assume it’s 50, and divide it on EPS (50/2=25). In this example, investors are paying 25 dollars for every dollar that Apple earns.
In other words, it would take the company 25 years to pay you back. A good PE ratio is considered something around 15. Anything higher than that could mean that the stock is probably overvalued. Tesla’s PE ratio is, for example, is 970.
Does that mean Tesla is overvalued? Maybe, or maybe not.
When finding a PE ratio of a certain company, we take into account earnings per share for the last 12 months, but when you invest in a certain company, past earnings don’t matter.
What matters is how much the company is going to earn in the future, which is why there is something called the forward P/E ratio.
Of course, You can’t know for sure how much the company is going to earn in the future, so the number that is used is the average of what experts usually predict.
If we go back to Tesla, despite it having an astronomical PE ratio (970), its forward PE ratio is closer to the earth at 123. This means, That you will have to wait 949 years to earn your money back if you invest in Tesla based on its past 12 month earnings, but experts are calming us down by saying that “don’t worry, its that long, Tesla is going to be much more profitable so its just 123 years” which is why most investors consider Tesla an overvalued stock.
But we all know that Elon Musk is an alien, and he is going to prove everyone wrong, as he does all the time. The price-to-earnings ratio isn’t the most accurate method to value a company, but it’s the simplest way to have a broad idea of how the company is performing.
The company might come up with a revolutionary product and beat all expert predictions. So to make a wiser prediction, you have to consider other analyses as well, such as Price to book ratio (P/B Ratio).
It basically means how much the company is going to earn if it sold all of its assets and paid off its debts. Let’s return back to Tesla. Tesla has Giga factories, thousands of charging stations, offices, patents, and a lot of other assets.
Let’s say they all amount to 100 million, but it also has a lot of debt, let’s say 70 million dollars. If we subtract its debts from its assets, we will get a book value of $30 million. So if Tesla has 10 million stocks, its book value per share is going to be $3 ($30M/10M shares).
To find out how much you will be paying for each dollar, you have to divide the stock price, which is, let’s say $15 by the book value of shares. In plain English, you will be paying 5 dollars for each dollar of assets that Tesla has.
A good price to book ratio is considered something around 1, but sometimes it’s really difficult to put a price on something like an algorithm that Instagram is running on or Snapchat filters. But financial analysis is just one part of the story.
Startups, for example, usually have a lot of debt and not many assets and might struggle with cash flow, but could end up becoming widely successful.
So never rely on financial analysis as the sole predictor of a company’s success, there are many other indicators, nevertheless, financial analysis can give us a better image of how the company is performing.
Thanks for reading and until next time.
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