I am never a fan of using TA for buying & selling besides simple support and resistance with occasional volume checks.
I do prefer to use FA instead.
Stock selection aside, which includes looking into company's business model, future potential, management track record, profit margin etc
My entry criteria is based on valuation.
The greater the discount to the stock, the better it is.
I usually check against P/E ratio and P/B ratio. Out of which, my fav is P/B ratio.
Why P/B ratio?
P/B ratio is known as price/book ratio.
In layman's terms
Price refers to price of stock.
While book refers to company's assets - liabilities. How I see book value is if the company is to close now, this is the amount that the company is worth.
In my opinion, if I can get P/B at 1. Means that the stock is fairly priced. If the stock getsdelisted or close down. I have gd chance of getting my capital back.
If P/B is 0.8? It will mean to me that the company is current valued at 80% of assets, potential upside of 20%.
Let's give an example:
$Sandfire Resources NL(SFR.AU)$ is currently priced at $6.2 P/B 1.15.
I entered the position on 26/9 at $3.72, around P/B 0.69.
Why entry at that price, cos using P/B I know that in the long term, I have significant chance of reaching price/book of 1. Which means 31% upside.
I sold my shares on 5/1 at $5.71.
approx P/B of 1.06. Why do I exit at P/B 1? Iexited as the stock has reached fair value. Itis no longer undervalued. I didn't want to overstay welcome.
I thought about using this example, as I made profit of 53.49% From sept 2022 to jan 2023. It's one of my best stock move in 2022.
To recap, my strategy is to find stocks that have P/B less than 1 and to exit once the P/B reaches 1. Profit the difference and move on.
Is this method fool proof?
Unfortunately nothing in investing is fool proof. Otherwise, monkeys will all be mooning.
What are the pitfalls of using P/B ratio?
1. P/B ratio could lead investors into value trap.
Cos the stocks are so cheap, people feel that they have a great bargain. However, stocks are actual companies, if the companies doesn't grow, they could end up taking up more and more liabilities to survive until it finally folds.
Hence, it is a lot better to use P/B ratio on profitable and quality companies. Stock selection is key.
2. Time
Companies can remain undervalued for very very very long time. Case in point?
I have been holding China banks for years. But well, they reward me with great dividends.Hence I really dun mind the wait. [Cool]
To counter this waiting, dividend stocks makes the waiting worthwhile.
P/B could be used as complementary indicator to decide on entry and exit points.
Hope that the above post will be useful to u.
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