1. Value the companies using an estimate of their cash profits.
- What is the cash yield a company is offering at the current share price?
- Is it high enough?
- How much of a company's share price is explained by its current profits?
- How much is dependent on future profits growth?
- If more than half of the current share price is dependent on future profits growth, do not buy these shares.
- You should try and buy shares for less than this value.
- Apply a discount of at least 15%.
- The interest rate applied to calculate the maximum price should be at least 3% more than the rate of inflation.
- The higher the price paid for profits/turnover/growth, the more risk you are taking with your investment.
- If profits stop growing, then paying an expensive price for a share can lead to substantial losses.
Investing using checklists is a very powerful method.
It focuses your thinking and guides you in the investing process.
If you are to be a successful investor in shares, you need to pay particular attention to the price you for for them.
- The biggest risk you face is paying too much.
- It is important to remember that no matter how good a company is, its shares are not a buy at any price.
Paying the right price is just as important as finding a high quality and safe company.
- Overpaying for a share makes your investment less safe and exposes you to the risk of losing money.
Also, do not be too mean with the price you are prepared to pay for a share.
- Obviously you want to buy a share as cheaply as possible, but you should also realise that you usually have to pay up for quality.
- Waiting to buy quality shares for very cheap prices may mean that you end up missing out on some very good investments.
- Some shares can take years to become cheap and many never do.