Why Invest in Stocks?

What stocks to buy today, Vershire Financial ratio analysis

Before we answer the question of how to invest in stocks, we have to address an even more fundamental issue. Why should investors even try to invest in stocks?

Investors should actively invest in stocks because achieving even a slight amount of success, in time, will lead to breathtaking results. It is incredible how achieving even a slight amount of outperformance can snowball into a small fortune.

(A Tale of Twin Brothers: The Incredible Power of Compound Return)

Actively investing is a worthwhile, achievable, and fascinating pursuit. Investors will be amazed at how they can succeed at this challenging but intriguing and rewarding endeavor.

Basic Principles

Having a sophisticated understanding of powerful but abstruse theories and models enhances your stock investing performance, but only slightly. Your basic performance is a function of whether you understand the basic principles. And the basic principles are simple and easy to grasp. Click the link below to learn what they are.

Basic Principles

Basic Principles in Greater Depth

The above report is a discussion of the basic principles the best investors understand. But you can be the best of the best if you understand these basic principles in greater depth and also understand the theories that inspired them. Those who grasp and appreciate the rationale behind powerful principles are the ones most skillful in putting those principles into practice.

Our stock guide explains these principles in greater depth and it delves into the rationale behind these principles. It unmasks the forces driving the market and details the approach best able to harness these forces. Furthermore, it introduces you to the practical and potent tools you need to beat the market. In short, it explains these basic principles in greater depth, scope, detail, and vividness.

In the process, it lays the theoretical foundation for active investing and compellingly explains why sensible, patient investors will always be able to beat the market. It is the last how-to book on investing you will ever have to read.

Our complete stock guide is available only to our premium subscribers. But right now, you can read the critical first two chapters by clicking the link below.

Vershire Stock Guide (How to Invest in Stocks Demystified)

Financial Ratio Analysis

Ratio analysis, guide on What stocks to buy today

The key to successful stock investing is to buy quality companies. And the key to buying quality companies is to perform a thorough and skillful financial ratio analysis. Click the link below to learn how to calculate and interpret the most powerful financial ratios.

Financial Ratio Formulas

Special Financial Ratios

Each of the above ratios is important. Each provides at least some insight that only that particular number can provide. But there are always going to be a few that are relatively more important than the rest. And if you study and weight these few ratios more heavily, then you will do even better. We provide special reports on these special ratios.

Insights from the Dividend
ROA = Doorway to Quality
The Brilliance of Earnings Yield (EV-Based)
Determining Earnings Quality (ROA [Cash])
Determining Asset Quality (Change in NOA)

Overall Fundamental Rating

Do you want to know What stocks to buy today or What stocks to buy

The above ratios are very powerful tools. But they are still just tools. They are a means to an end. Ultimately, you want to consolidate them into one comprehensive and unequivocal recommendation.

A significant fringe benefit of doing this consolidating is that the error in each ratio gets canceled out when combined into a whole. The insight in each ratio becomes more obvious. It is easier to see a pattern or a theme when you consider many interconnected numbers. You can identify a star easier when you can view the constellation of which it is a part.
Not only is the final product of consolidating these financial ratios into one overarching recommendation very valuable, but the mere act of consolidating is itself rewarding. The journey is its own reward.

You should make this journey. You should try to combine these different ratios into one definitive recommendation on each and every company in which you have an interest.

But performing this function skillfully takes practice. Until you have had that practice, you can rely on our
Overall Fundamental Ratings. We have already performed the very function we advise you to perform and condensed our work into one unequivocal rating reflecting the fundamental strength of each of the roughly 2,000 companies we follow.
Our stock ratings and their meanings are shown below.

Rating Fundamentals Recommendation
A Great Strong Buy
B Good Buy
C Fair Hold
D Poor Sell

 

Over our 10-year existence, stocks with the strongest fundamentals trounced stocks with the weakest fundamentals in terms of both risk and return.

Lowest-Rated Highest-Rated
Return 2.169 3.062
APR 0.076 0.109
Risk 0.248 0.165
Return/Risk 0.305 0.661


Recommended Approach

Study and calculate as many financial ratios as you can. The more effort you put in, the better you will do. Start with our Overall Fundamental Ratings. If a firm is rated highly by us, you can be certain most of its fundamentals are solid.

However, try to add value to our recommendations. You possess knowledge we do not. And, in time, you should be able to improve on the performance of our Overall Fundamental Ratings.

To do this, study the ratios we have discussed. Put the most weight on the financial ratios we categorized as particularly powerful and insightful. But also, try to weight the various numbers based on your style of investing and based on what your experience has told you are most important.

Lastly, never make a buy or sell decision based on a single number (unless that single number is the composite of many other numbers). No single number is so powerful that you can focus on it myopically. Furthermore, that single number may be in error; all financial data (regardless of the source) have at least some errors in them. Mistakenly relying on bad data, on occasion, is inevitable; and utilizing scores of different numbers to make an investment decision mitigates the damage. Basing a buy or sell decision on only a few numbers is as foolish and irresponsible as building a portfolio of only a few stocks.

Conclusion

The main theme of this page (in fact the main theme of our entire website) is the following: basic financial analysis works. And if you are patient, you will be stunned by the degree with which it works when given enough time (A Tale of Twin Brothers: The Incredible Power of Compound Return).

Basic financial analysis may not be quick or effortless. And it may not work overnight. But it works. If you crunch straightforward numbers based on logical principles you will find fundamentally strong companies. And if you buy fundamentally strong companies, you will beat the market in terms of return and in terms of risk.

Glossary of Key Terms

Lastly, there are many terms and concepts that are particularly useful to understand in stock analysis. Below we list some of the key terms in finance and economics. You can study them all now, or reference them when you need them.


Accounting Equation Efficient Market Hypothesis (EMH) Maturity Risk Premium
Accrual Basis Accounting Efficient Portfolio Micro Economics
Alpha Elasticity of Demand Monetary Policy
Altman’s Z-Score Equity Risk Premium Multiple Discriminant Analysis
Arbitrage Exponential Smoothing National Bureau of Economic Research
Arbitrage Pricing Theory Federal Funds Rate National Income Accounting
Autocorrelation Federal Reserve System Net Present Value
Backwardation FIFO Net Interest Margin
Beta Fed Model Net Interest Spread
Black-Scholes Option Pricing Model Financial Accounting Normal Distribution
Bottom-Up Analysis Financial Accounting Standards Board Off-Balance-Sheet Entity
Break Even Analysis Financial Analysis Off-Balance-Sheet Financing
Business Cycle Financial Leverage Open Market Operations
Buy-and-Hold Strategy Financial Ratio Analysis Operating Leverage
Capital Allocation Financial Ratios Operating Lease
Capital Asset Pricing Model (CAPM) Financial Statement Analysis Opportunity Cost
Capital Intensive Fiscal Policy PEG Ratio
Capitalization Rate Fixed Costs Percentage of Sales Method of Financial Forecasting
Central Limit Effect Free Cash Flow Pooling-of-Interests Method
Cobb-Douglas Production Function Fundamental Analysis Preferred Stock
Coefficient of Determination Fundamental Beta Pro Forma Financial Statements
Common-Size Financial Statements GDP Price Deflator Product Financing Arrangements
Constant Growth Model Generally Accepted Accounting Principles Production Function
Consumer Price Index Geometric Return Purchase Method
Contango Gross Domestic Product Quadratic Programming
Common Stock Valuation Growth-at-a-Reasonable Price Quality of Earnings
Contribution Margin Percentage Growth Investing Quantity Theory of Money
Correlation Coefficient Horizontal Analysis Ratio Analysis
Cost Estimation Index Investing Regression Analysis
Cost Function Industries Research and Development Financing Arrangements
Cost of Capital Inflation Returns to Scale
Cost Plus Pricing Internal Rate of Return Sale of Receivables with Recourse
Cost-Volume-Profit Intrinsic Value Sectors
Covariance Investment Philosophy Security Market Line
Defensive Stocks Investment Strategy Sharpe Index
Deferred Tax Liability Jensen Index Standard Deviation
Deflation Labor Intensive Stock Fundamentals
Demand Function Laffer Curve Supply-Side Economics
Demand-Side Economics Law of Diminishing Marginal Return Systematic Risk
Demographic Analysis Law of Large Numbers Technical Analysis
Derivatives Leading Economic Indicators Term Structure of Interest Rates
Direct Costs Leases Top-Down Analysis
Discount Rate LIFO Trend Analysis
Disinflation Linear Programming Treynor Index
Dividend Discount Model Macro Economics T-Statistic
Dollar-Cost Averaging Managerial Accounting Value Investing
Double Entry Bookkeeping Marginal Analysis Variable Costs
Du Pont Analysis Marginal Costs Variance Analysis
Durbin Watson Statistic Marginal Product Vertical Analysis
Economic Profit Marginal Rate of Technical Substitution Working Capital
Economic Value Added Marginal Revenue Yield Spread
Economies of Scale Market Risk Premium Z-Score
Economies of Scope Master Limited Partnership