Before you invest in a stock, you need to analyze the company and then make a valuation. Finally, compare the valuation to the current price. If the current price is much lower than the valuation, buy it, because it’s a discount.

# How do you analyze it? How do you value it

Just like taking different rotary head to repair different electrical appliances is the same principle, we should take different indicators to quantitative analysis and quantitative valuation. Different industries need different indicators, different companies in the same industry also need different indicators, and the same company needs different indicators at different times. So, stock investment, like a skill to repair electrical appliances, take different tools (indicators) to repair (quantified) different electrical appliances (companies). What we need is a constant stream of new metrics. It’s not that hard, but it takes a lot of learning, and we all know that there is no end to learning any skill. The more methods we master, the lower the natural risk and the higher the return will be. Let me take one of the indicators, PE, for an example.

# What is PE?

PE is used for valuation of one of the tools, weapon Oh: PE, the abbreviation of the price/earnings ratio. P/E = Market Value/Earnings (Market Value is how much the company is worth, and Earnings is how much the company makes in a year) Market Value = Share Price * Number of Shares, which is what the company is quoted at in the market, the selling price. Profit (net profit) is the company’s net profit for one year. PE means, that is, if I buy this company all back, rely on it to make money for me, a few years later can return to the original. In other words, one of the functions of PE is to help us simply assess whether a company is expensive or cheap. This is PE, okay? Remember what we did in the course? Analyze, then value, then buy and sell investments. First analyze the company. If it is a good company, we will evaluate it. If it is overvalued, we will not buy it; if it is undervalued, we can buy it. So valuation is a very important step to get all the analysis to the ground.

And PE is one of the most commonly used valuation formulas. I don’t know where to start, a problem that all beginners encounter. For example, in the picture below,

Is the P/E ratio actually negative? Why is that? You know why not? Remember what the P/E ratio is? Price/earnings ratio = market value/earnings. Under what circumstances is the P/E ratio negative? When a company is losing money, that is, the denominator of the formula is negative, the P/E ratio will be negative.

P/E ratio, in simple terms, is how many years can return to the capital. Let’s do another example.

Do you dare to take a company that will take 171 years to pay back?

This is the rhythm of buying a stock and passing it on to generations. So this PE, we know how to use it, right?

There is also the case that some stocks with a particularly high P/E ratio seem to be doing well. This is the result of short-term capital speculation, commonly known as the “bubble”. Once the bubble bursts, it will fall off a cliff. Therefore, it is not recommended to follow the trend, because there is no way to know what will be withdrawn. That’s what I mean by the risk of not knowing is the greatest risk of all. In the vast sea of 3,000 stocks, we can use the P/E ratio to eliminate most of the bad stocks. There is a word to say in the stock market: 7 lose 2 draw 1 earn. Because most people choose is according to hearsay, or directly by the feeling of the election, this kind cannot be called investment at all, with gambling about the same. Let’s go back to this seven losses, two draws and one gain. If, A classmate, buy A stock randomly from more than 3000 stocks now, that his profit and loss probability is 7 lose 2 draw 1 earn. Mr. B knows how to use PE. From more than 3,000 stocks, he has eliminated the companies with negative P/E ratio and the companies with a return of capital in more than 30 years. How many companies are left? Therefore, investment risk is largely related to the amount of knowledge you master, and so is the rate of return.

I like the idea of investing in stocks as a screening mechanism. What does it mean? It means that every point you understand, you have a higher probability of profit, a higher yield, and a lower risk. It’s not hard to invest in stocks, it’s just how much time and effort you’re willing to put into preparation. We use different indicators to analyze, to compare peers and so on. We’re all screening, we’re weeding out bad companies. These skills, like magic, are not easily revealed. But people who know it will think how so simple, people who don’t know is how can not see through. You can’t really understand a field by standing outside a wall.