The simple words of Ronnie Becker, CEO of Cream Bank, must have caused a stir among people in the stock market. He said that one day he would stop buying stock in companies with high debt ratios. He would not touch shares of companies with debt to EBITDA multiple greater than three.
This inspired by Ronnie to write an article “Stop Buying and Save Money.” The message seems to be: buy stocks that will pay off in due time, despite the current market condition. Anhedonia?
What is the actual value of these stocks?
The funny thing is, while stock prices are crazy, they do not follow free-falling stocks. The fact is, a lot of companies that trade at a low price are very likely to be worth their share price in the future.
So you need to find out how much the companies are worth by looking at past market history, projecting the future price and also comparing it to other stocks that trade for a similar price. Before I share some of my thoughts on this topic, let me first describe how I define fair value.
Fair value is the amount that would be paid for each share of a stock. It is the maximum amount that would be paid in a transaction for a given price. You will not find this figure in the prospectus or report of any company, but it is an essential consideration when buying a stock.
If you want to earn a lot of money in a short period of time, you need to follow this rule – each share of a stock is worth more than its market price today. This means that you should only invest in companies that are trading for a fair value at a specific date in the future. Of course, it is always tempting to buy shares of a stock that are cheaper today, but what can you expect to earn from those purchases? In many cases, it is a useless move.
Investing in the stock market is not for the timid
It takes courage to take a risk by buying a stock that may pay off in the future. Most investors get into a lot of trouble with their investments because they believe in the company’s or the CEO’s statements, but they do not act on those thoughts.
To explain this better, imagine yourself riding in a speeding car, looking at a billboard advertising a company with shares that have fallen to a low price. If you do not act on that opportunity, you will surely get trapped in the speeding car and die in a crash.
A little safer is to find a company that you believe in, which has shares that are about to fall, in its own “I’m duet” moment. A company that has a share price that is very low now will probably go up in the future, but not necessarily instantly. There is a lag time between the recent fall in price and the time when the shares will actually appreciate.
Companies “Peak point”
Therefore, it is wise to consider the “peak point” for the company. Every company that trades for a low price will soon have an opportunity to rise. So, when the stocks increase in value, you could use them to buy more shares of that company.
And if there are future opportunities to earn a lot of money from your purchase, just wait for those days to come and realize the potential profits. And of course, the most important thing is to start investing with your mind and not with your heart.
So, here is the point that Ronnie was trying to make -listen to your instincts, look at past market history and compare the shares of a company to other stocks that trade for a similar price.