Or else, have you ever seen a share; for a long time, drifting sideways, long forgotten by everyone; all of a sudden, get a kick start and start to ascend like a hot air balloon - slowly but steadily and continually - never even think about stopping anywhere?
Have you thought of getting a chance to ride on such a share; at least in wildest of your dreams?
Let this thread be a humble effort to help identifying such shares; or at least help justifying to ourselves the existence of such shares in the real world.
This is supposed to be an extension of the earlier thread and related posts;
Earlier, we discussed the following:
* Stock market is made up of 4 variables: shares, prices, volumes and time
* If we trade randomly, our winning chances are less than 30%
* If we use cyclic nature of share movements to our advantage; the winning probability will become 30%+10% = 40%
Last time we discussed the variable - time
Let's now take another variable to our discussion - shares (stocks or counters).
There are nearly 250 shares in CSE (may be more now)
Do you think all the shares have equal possibility to bring us profits in near future? Or in other words, do all of them have equal 'energy' to grow tomorrow?
(Well, it's a no-brainer!).
At any given time, not all the shares have equal potential to bring us profits. That part anyone can guess. But the tricky part is how to differentiate (and identify high potentials).
What can make a share move (or grow)?
Out of dozens of probable causes or reasons, In this thread, I would like to discuss only one of them, and call it the 'potential energy' (intrinsic value).
What is potential energy?
Most of us may know.
Anyway, let's take an example as a starting point.
Imagine a long road. Imagine this road goes over a hill and makes a long slope. Imagine there are few heavy (big, up to your waist) stone balls at the end of this slope.
Now, all of these stones are just lying there, none is moving. We say, non of them have 'potential energy' to move.
Suppose you select one stone and roll it hard along the road uphill. Now you have to push and hold it hard in order to prevent the stone from rolling coming down the slope; so you roll it and hold, midway uphill.
Now, we don't release the stone yet but if we released, it would start rolling down. At this stage, we say, the stone has some 'potential energy' (you may loosely call it 'intrinsic energy' as well).
Now, if this stone is rolled more uphill, we say it will gather more potential energy.
If we hold stones at different heights, they will have different 'potential energy' values ('intrinsic values').
Got some idea?
Now release your stone...
It will start slowly rolling down, then gather more and more speed as it rolls down.
When it rolls down, the potential energy value comes down but the speed (or the momentum) keeps on increasing until it comes right to the very bottom of the hill.
Now, it has no potential energy, so, will it stop right there? Nope, the momentum will bring it further away beyond its potential (intrinsic value) level.
END OF EXAMPLE.
(I have observed some shares move just like the stone in our example. Let's talk about that in another day)
Now, I guess, we are somewhat clear about the concept of Intrinsic value in general (In terms of grade 8 science subject at least).
What do we exactly mean by intrinsic value when it comes to a share?
Let's take another simple example;
(I call this 'home made common sense' approach of identifying 'intrinsic value').
Suppose there is a hotel in your town, and it is listed in CSE (obviously). Suppose it has not been open for couple of years for business due to renovation work. The revenue has been nearly zero for many a months. It has been making consistent losses for many quarters. The share price has dropped virtually to zero.
But since you walk by there daily, you see things are going to change pretty soon. The hotel is getting ready for the next tourist season in a grand manner. With all new outlooks, new facilities, etc etc. And this hotel is located in the most prime location in this tourist town as well.
Do you think it is good time and good price to buy the share now?
Another no-brainer; Isn't it?
Well, quite contrarily, in the stock market, nobody cares a damn about this share yet. It is laying in a corner, rusted and unnoticed.
But if you use your 'common sense' valuation, you will identify the potential, you will see the 'intrinsic value'.
What made us to identify the potential?
We used our imagination to visualize the future of the business!
We visualized 5 weeks ahead; 5 months ahead or probably 5 years ahead.
Is this a good tool?
When used properly, this is a powerful tool good enough to build you an entire empire!
No! above is not my own idea; but if you need a proof ask Warren Buffet - the richest philanthropist in the world. (Mr. Buffet, I guess you don't mind me quoting your name here).: (-I wish he was reading this- )
Apart from our 'home made' approach, There are a wide variety of systematic analysis methods to identify the potential value of a share. These techniques may span across a wide range; may be as simple as our home made model or it could be a thorough analysis of company resources, business trends, socio-economic factors etc etc etc. One such concise system I came across is CANSLIM, it touches upon the concept of potential value.
Whatever the method use, in my view, the basic principle remains the same: you are trying to judge the future situation of the business. You are trying to visualize how the business will perform in the future.
And by the way, I almost forgot to say, (in my view) this is what mostly 'fundamental analysis' is all about.
Some may agree, some may not, but as I understand, this is what fundamental analysis is all about.
Do you agree, trying to find 'potential' shares to invest is important?
If yes, let's try to quantify the effect on our winning chances.
Let's not go into extremes of building empires, but just give our 'home made' approach a fair percentage. Can we agree on 10%?
That means, if we try to identify shares with a potential to grow and invest in them, our winning chances are increased by 10%
[A word here:
I am not an expert in fundamental analysis. Not an expert in Intrinsic value identification either. The objective of this discussion is enabling you to try out this yourself or learn from an expert with an understanding of its effect on your probability of making profits. There are many experts in the subject matter even in this forum. I believe they will continue to extend their help]
Now, let's summarize;
If we trade randomly, our winning chances were 30%;
using time to our advantage, it became 30%+10% = 40%
Then, if we select our 'potential' shares and use time to our advantage our probability of winning profits becomes 30% + 10% +10% = 50%!!
We are almost there; but, as we know, 50% is not quite good enough to make consistent profits; we are still on the fence; we need one more apple to add to topple the cart; we need one more atom to exceed the critical mass; we need one more Rupee to pass the break even point.
If you feel like this is the path to start that nuclear chain reaction; if you think you are tough enough to withstand another round of my bragging, let's move on to find another 'bent coin' to add to our arsenal.