Wednesday, February 11, 2009

Ideal time to buy shares

With recession hitting almost all the countries directly or indirectly, people and corporations have started to save money and cut their expenditures. This leads to reduction in flow of money in the market. This severely damages the economy of the country. Money flow is very important for a growing economy. But, the fear of uncertain future has lead people to spend less and save more. People have liquidated a large amount of their investments. This has lead to massive devaluation of share prices of almost all the companies. For any cunning investor this is a heavenly time to invest in those shares. The market is bound to bounce back. The share prices are bound to shoot up.

The major principles laid down by Benjamin Graham, one of the teachers of Warren Buffet, are:
1) Buy shares of those companies whose share value is 2/3rd of the intrinsic value.
2) With low P/E ratio.
Intrinsic value is an element to measure the true value of one share. A simple calculation of evaluating it would be getting the net assests of the company divided by total shares.
P/E ratio is total price of one share divided by the earnings the share gives in one year. Lower P/E ratio means you will earn amount equal to share value in shortest time.
Thus analysing the current situation where the share prices have fallen to very low values, well below the 2/3rd margin and choosing lower P/E offering companies, it is an ideal time to buy shares. When the market rises out of recession, even capital gain will be in huge positive magnitude.

Also, note the pointing of Warren Buffet, who believes in buying devaluated shares of big and strong companies as these companies' shares are bound to bounce back.

No comments :

Post a Comment