The Simplest Way to Invest #3

In the previous post, we tried to create a portfolio using the Market Price / Book Value ratio. We looked at the results of an imaginary ₺100,000 investment in a period of one year and five years.

This post is going to be about the P / E ratio. This ratio, which is defined as the price-earnings ratio, is the ratio of the price per share of a company to the profit per share.

XYZ has one million shares -one million lots- in circulation. XYZ made a million dollars profit this year. So what is the earnings per share? It is a dollar. Let’s say one lot of XYZ is trading at $ 30 on the stock market. This stock you bought for $ 30 will bring you one dollar of profit according to the profit announced in a one-year period. Do you think this is a sensible investment? Of course not. This means that I will invest 30 dollars and only make a dollar profit. In that case, it will take 30 years for me to pay off my investment. That’s the rule. But of course, even a share with a P / E ratio of 180 can make a premium, increase or decrease. Why is that? Because the profit to be announced in the next balance sheet will increase, as a result of their follow-up, investors notice this in advance and start investing. So could there be another reason? Yes, it could be just a speculative increase. Think about it, you will make an investment. An airline stock catches your eye. This is when the Covid-19 cases are on the rise. The shares are on the rise; P / E ratios are very high and P / B ratios are also high; But there can be no sectoral expectations, you are in the middle of the Covid-19 pandemic. It is not possible for an airline company to make enough profit to raise its shares in this environment. Here you need to understand that the rise of this stock is speculative and perhaps even manipulative. There will be no stability in speculative ups. Risk is high due to lack of stability. You can buy the stock at a high value and watch its value decrease. So, we need to understand whether the increase or decrease of a share is speculative.

Let’s create our portfolio now. I will create a portfolio from the end of 2014 and the beginning of 2015. We will be watching a one-year performance. Just like I did at the P / B ratio, this time I will select four companies. The companies I choose will be those with the lowest P / E ratio. Remember, a low P / E ratio means the stock is cheap. Well, is there a rule that if it is less than 1 as in the P / B ratio, it is cheap, and if it is higher than 1, it is expensive? Nope. The basic rule here is that the P / E ratio can be at the smallest values higher than 0. Where the price of all is 190, 150 is cheap. If the price of all is 5, 8 is expensive. So, when looking at the P / E value, we will look at “others” and say something relatively. Here, taking “others” as other companies in the same industry will give a better, more reliable result.

For the above timeframe, the four companies I will add to my portfolio are: TUPRS, YKBNK, THYAO and ALBRK. (These are stock exchanges in Turkey.) 

Warning: This is not investment advice. The chart below is from 2015 and is without details. It was created to give an idea. The following companies are in Turkey.

Blue Line: My Portfolio

Orange Line: BIST100 (the average earnings of the 100 largest companies on the stock market in Turkey)

As you can see, the portfolio I created using ONLY the P / E ratio performed very superior to BIST. As my portfolio started the year with an index of around 3800; It ended the year with an index of around 6500. BIST started around 350 and finished around 420. While my portfolio made my ₺100 roughly ₺170; BIST’s overall index made ₺100 to ₺120. The inflation value for 2015 was 8.81%. Therefore, I have achieved a very superior performance as a result of a year investment with the P / E ratio. I was able to make a profit well above the inflation rate. Without tiring myself, without getting lost in many fundamental and technical analysis terms, without watching the indexes on the screen for hours; I could only create a portfolio that I controlled from balance sheet to balance sheet, month to month. This is actually the nature of the investment. Investing is not about trading constantly, but about making a satisfactory profit at the end of a certain period by investing money in the right places.

I will check my portfolio again at the beginning of 2016. I will examine the P / E and P / B ratios of the shares of four companies in my portfolio. I will examine other companies in the same sector, if the P / E or P / B ratio has increased too much and there are no new investments that may come from the company whose shares I bought, I will remove this company from my portfolio. I will look at the stocks of other companies. Since I know that this process will take some time, if I start all this work in early December 2015, I can start 2016 with solid research and knowing what changes to make in my portfolio. In this way, I can maintain around 70% profit per year with simple techniques. If I keep this investment for five years and keep my profit rate of around 70% by making the right moves, my ₺100,000 could reach around ₺1,500,000. Moreover, 70% rate is not bad annually for someone who is interested in the stock market, but it is not exactly what is desired. We expect 100% annual return in the stock exchange. But for this, we know dozens of techniques and follow closely. Therefore, it is not bad to have a 70% return without spending that much effort.

You may have noticed something. Return on investment with P / E was better than return on investment with P / B.

THE SIMPLEST WAY TO INVEST

THE SIMPLEST WAY TO INVEST #2

You can find all my posts about investments here.

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The Simplest Way to Invest #2

In the previous post, we talked about the importance of risk sharing and the need to create a portfolio to share risk. We said that the first step in creating a portfolio is to look at the P / B ratio of the shares we will buy. This ratio helps us to understand whether the lots we will buy are cheap or expensive. You can check the previous post for detailed information on this subject. In this post we will examine a sample portfolio.

Warning: This is not investment advice. The chart below is from 2015 and is without details. It was created to give an idea. The following companies are in Turkey.

In the first quarter of 2015, while looking at the P / B ratios of the company shares, I saw that the P / B ratios of ECILC, DOHOL, VESTL and TRGYO companies were low. This means their shares are cheap.

The blue line in the chart below shows the average earnings of these four companies ECILC, DOHOL, VESTL and TRGYO over 2015. The orange line shows the average earnings of the 100 largest companies on the stock market in Turkey (BIST100).

As you can see, the index created with these four companies has gained value in a year. I formed the index of the portfolio by looking at the values of the last four days of the stock exchange’s closing in 2014. The index of the portfolio was roughly 1480 at the time, while the BIST was around 400. By the end of 2015, while BIST did not even reach 500, the portfolio I created approached roughly 2300. This means that when 100 thousand Turkish Lira was invested, it became 155 thousand Turkish Liras at the end of 2015. If this performance continues for five years, when 100 thousand Turkish liras are invested, it becomes approximately 1 million 280 thousand Turkish Liras in five years. However, this portfolio may not show the same performance for five years.

When we create a portfolio, we need to check the P / B ratios of the companies we buy from their shares, and when we determine that the ratio has reached saturation according to itself and the sector, we need to sell our shares. Now we can get our profit. Then we can buy another cheap stock with a low P / B ratio and add it to our portfolio. If the P / B ratio of the company whose shares we bought does not reach saturation for many years, we can continue to make profit without effort.

Here, it is necessary to mention the loss of value of money. Suppose we buy 100 thousand Turkish Liras worth of shares and sell our shares for 1 million 280 thousand Turkish Liras at the end of five years. When we look at the inflation values between 2015 and 2020, we see that the purchasing power of 100 thousand Turkish Lira at the beginning of 2015 is equal to the purchasing power of 550 thousand Turkish Lira at the beginning of 2020. Still, we made 175% profit.

In this example, we saw that we made a profit without tiring ourselves on an investment we made just by looking at the P / B ratio. If we make the right investment and follow it correctly, we can easily make a profit. To be able to do this, there is no need to stress, watch the stock market for hours, sit in front of the screen all the time, learn technical analysis terms…

If you want to start investing, you can start by trying to identify stocks with a low P / B ratio. If you don’t have any experience yet, create a portfolio and follow it without buying shares. Or buy one lot from each of the companies you choose. This will cost around $ 25-50 on average. Follow the lots in your portfolio for a few months with online banking. By taking such small steps, you can start investing and gain experience.

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The Simplest Way to Invest #1

People think investing is dangerous, risky or scary. But the only thing to do is to learn how to invest without worrying. Investing cannot be learned overnight. Still, it is something you can move forward quickly. It is possible to create the right portfolio by looking at very simple indicators and making very simple analyzes.

You need to create a portfolio for risk sharing. Professional investors say “don’t put all your eggs in one basket”. Because if all your eggs are in one basket, you may lose all your eggs when something happens to your basket. In this case, you have nothing else to compensate for your loss. Novice investors often make this mistake. However, when things go wrong, you should be able to balance the loss from one investment with another. If you have many baskets, it won’t be a big problem if one of your baskets falls. That’s why we must diversify our investments and create a portfolio.

As the first step in creating a portfolio, we should look at the P/B ratio of the companies we will buy shares. This ratio helps us to have an idea about whether the lot we will buy from that company is cheap or not. If the ratio of Market Value (P) and Book Value (B) is less than 1, the share is cheap. When it is higher than 1, we say the share is expensive. But of course this is not always the case. Sometimes, even if a company’s P/B ratio is 4, we consider that company’s stock cheap. Because the industry of the company may have started to improve. As a result of this, all profit rates and market values of companies in that sector increase. While the ratio of the company we are looking at is 4, the P/ B ratios of other companies in the sector may have reached values such as 8, 10, 15. Then we can think that the share of this company is cheaper than other companies for now and will be valued. However, the reason why a company’s stock is cheap is important. Is this company not yet valued in the industry or does this company have a problem? Did the company borrow money but couldn’t pay its debts? Was there a negative news in the media? Does the company have foreclosed assets? Is the owner / CEO a bad reputation?

It’s easy to learn all this. After typing the name of the company and “P/B ratio”, search on google. In the results, there will be sites showing the company owner, company executives and company partners. You can also search those names on the internet. Explore, find the site you can read most comfortably. What you have to do is google the code of a company that has publicly listed shares on the stock exchange. On the Internet you will find announcements, postings and notifications made by the company. Check them out too.

Let’s say you looked at company executives, company’s announcements and investments; you did not see anything negative. While the company’s P / B ratio was 4, the others in the same sector were 10, 15. If you haven’t seen anything negative, you can say that the shares of this company are cheap for now even though the P / B ratio is higher than 1. The cheaper will be valued. You can now add this company to your portfolio for medium term investment. But remember, don’t put all your eggs in one basket.

If you are interested in investment, check out these also:

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The Difference Between Your Work and Your Business

The education system focuses on finding good jobs for young people by developing their knowledge-based skills. It shapes the lives around the salaries. After young people develop their interest-based skills, they move up the stages of education to improve their professional abilities. They are trained to be engineers, scientists, cooks, police officers, doctors, artists, writers etc. The skills they acquire allow them to join the workforce to earn money.

If you study cooking, you will become a chef. If you study law, you will become a lawyer, if you study medicine, you will become a doctor. The misconception of working in the same branch is that people forget to look after their own business. They spend their lives working in someone else’s job and making that person rich.

There is a big distinction between your job and your business. Everyone should have their own business.

To be financially secure, one has to look after his own business. Unlike your income column, your business revolves around your active column. As mentioned earlier, the first rule is to know the difference between active and passive and have active funds. While everyone cares about their income accounts, the rich pay their attention to their active column.

That’s why we hear them all too often: “I need time.”, “Oh, if I were promoted…”, “I need to work overtime.”, “Maybe I’ll get a second job.”, “I’ll quit for up to two weeks. I found a higher paid job. ”…

These ideas still related to the income column. A person provide financial security only if she uses her additional money to acquire income generating assets.

The main reason why the poor and the majority of the middle class are financially conservative and do not want to take any risks is that they do not have financial knowledge. They have to stick to their jobs. They tend to take firm steps.

For this reason, people with low income put themselves in serious financial difficulties. They sell their assets to avoid cash shortages. They start by selling their personal possessions, but the money they get in return is lower than what is written on their personal balance sheet. If they make a profit, then they pay the tax. Thus, the state gets its share of the earnings, which reduces the amount that will save them from debt. That is why the person’s net profit may be ‘lower’ than he thinks.

Start your own business. Keep working full time, but also avoid passives or personal items that lose their true value when you bring them home. Buy real active assets. A new car loses 25 percent of the price you pay as soon as you start driving. Even if your banker says your car is your number one asset, the car is not a correct asset. A trendy $ 400 basketball shoe equates to $ 150 at the first game.

Adults need to keep their spending low, decrease their passives and patiently create active funds. Parents should teach adolescents the difference between active and passive. Before teens leave home, get married, buy a home, have children, and buy everything on credit, they must begin to have active funds. Such as stocks, bonds, income generating real estates or copyrights from intellectual works like music, writings, patents and anything else that has value, generates income, or is ready to market and increases its value…

You may want to read WORK IN THE SAME FIELD BUT EARN MORE.

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