Saturday, October 11, 2008

Stock : When to Buy at What Price

This explains how I buy stock, when to buy and at what price.  And why I don't really bother global recession and market fluctuation.  Actually that is not right, I do get very excited during down turn.  Its not often you get this kind of opportunity knocking on your door.

There are a lot of reasons and fundamentals behind this method but here I will just list down the practical steps now.  Explaination to follow in future posts.

1. find out the historical EPS ( for the past 10 years if available )
2. determine the EPS growth rate from #1
3.  by using this EPS growth rate, forecast to future EPS ( ie.10 years later )
4.  pick a reasonable PE for your stock
5.  use PE from #4 and the future EPS from #3 to calculate the Future stock price
6.  decide a return rate you want to achieve ( ie. 15% )
7.  Backdate the future stock price in #5 to today's price using interest rate in #6
8.  decide a safety margin ( ie. 50% ) and finally you have your target buying price !

There you go, When the stock price is lower than #8, BUY !!

example :
1. EPS is 0.28 to 1.12 in past 10 years
2. so the growth rate is about 15%  ( you can use rule of 72 )
3. 10 years later, the EPS will become 4.48
4.  PE = 10 from magazine/newspaper
5.  stock price = PE x EPS = 10 x 4.48 = 44.80
6.  15% means doubling every 5 years or doubling twice in 10 years
7.  44.80 / 4 = 11.20  ( 11.20 double twice in 10 years becomes 44.80 )
8.  11.20 / 2 = 5.60

So if the stock price goes below 5.60, I will buy.