How to Analyze a Single Stock
Summary
TLDRIn the video, Philip shares his grandmother's wise investment in Disney stock, which grew significantly over time. The script then delves into the art of stock picking, contrasting technical analysis, which focuses on historical price movements and patterns, with fundamental analysis, emphasizing a company's financial health and value. It also touches on qualitative factors like management and industry trends. The video concludes by suggesting that a balanced approach, combining these methods, is key to informed investing, echoing Warren Buffett's investment principles.
Takeaways
- 🎁 Philip received a Disney stock as a gift, which grew significantly over time.
- 📈 The stock's value increased from $1.40 to $35 per share, and the number of shares multiplied due to stock splits and dividends.
- 🏠 In 2007, they sold the shares for $1,600, using the money for a down payment on their first house.
- 🤑 Philip realized an 114,100% return on the initial investment.
- 📊 Stock analysis methods are categorized into technical analysis and fundamental analysis.
- 📈 Technical analysis focuses on historical price movements and trading volumes to predict future trends.
- 📊 Back-testing is a key concept in technical analysis, looking for repeatable patterns like 'cup and handle' or 'candlestick'.
- 📈 Moving averages and crossover strategies are used to signal buying or selling opportunities.
- 📊 Fundamental analysis examines a company's overall strength and financial stability.
- 📈 Fundamental indicators like EPS (Earnings Per Share) and P/E (Price-to-Earnings) ratio help in comparing companies.
- 📈 Qualitative elements such as competitive advantage, management quality, and industry trends also influence investment decisions.
- 💡 Warren Buffett's investment approach considers returns on capital, management quality, and sensible pricing.
- 💼 The script encourages becoming a more informed investor by combining different analysis approaches.
Q & A
What was the initial investment Philip's grandmother made for him?
-Philip's grandmother gifted him a certificate for a single share of Disney stock for $1.40 when he was a newborn.
How many shares did Philip end up owning after decades?
-After multiple stock splits and dividend investments, Philip owned over 50 shares.
What was the selling price per share when Philip sold his Disney shares in 2007?
-The share price had grown to about $35 each when Philip sold them in 2007.
How much money did Philip make from selling his shares in 2007?
-Philip sold the shares for around $1,600 in 2007.
What did Philip and Julia use the money from selling the shares for?
-They put the money towards the down payment on their first house.
What was the percentage return on investment Philip realized from selling the shares?
-Philip realized a whopping 114,100% return on that investment.
What are the two major categories of stock analysis mentioned in the script?
-The two major categories of stock analysis mentioned are technical analysis and fundamental analysis.
What does technical analysis focus on?
-Technical analysis focuses on tracking price movement and trading volume of a company's stock, looking for historical patterns to predict future opportunities to buy or sell for profit.
What is back-testing and why is it important for technical analysts?
-Back-testing is the process of studying past market data to evaluate and verify trading strategies. It is important for technical analysts because it suggests that specific movements of the stock price or trading volume will be repeated in the future.
What is the moving average and how is it used in stock trading?
-The moving average is a constantly updating average price or trading volume of a stock. It is used in trading strategies like the crossover strategy, where traders look for the share price to fall below or climb above the moving average as a signal to buy or sell.
What are fundamental analysts concerned with?
-Fundamental analysts are concerned with the overall strength and financial stability of a company. They look at factors such as profitability, economic resilience, and whether the company is currently undervalued.
What are the two essential fundamental indicators mentioned in the script?
-The two essential fundamental indicators mentioned are earnings per share (EPS) and price-to-earnings (P/E) ratio.
How do qualitative elements factor into stock analysis?
-Qualitative elements include factors such as a company's competitive advantage, management quality, and industry direction. These elements are not quantifiable like technical or fundamental analysis but can significantly influence a company's health and an investor's decision.
What are Warren Buffett's three general rules for choosing a company to invest in?
-Warren Buffett's three general rules are: 1) The company must earn good returns on the net tangible capital required in their operation. 2) They must be run by able and honest managers. 3) They must be available at a sensible price.
What is the ultimate goal of stock analysis according to the script?
-The ultimate goal of stock analysis is not to become a magical stock soothsayer but to make the investor more confident and informed.
Outlines
📈 Stock Investment Journey and Analysis Techniques
Philip shares his personal story of inheriting a single share of Disney stock as a newborn, which grew to over 50 shares through stock splits and dividends, eventually being sold for a 114,100% return. The narrative transitions into an educational segment on stock analysis, highlighting two primary methods: technical and fundamental analysis. Technical analysis is described through its focus on historical price movements and trading volumes, using tools like back-testing and patterns such as the 'cup and handle' and moving averages. Fundamental analysis, on the other hand, is portrayed as an approach that examines a company's overall financial health and stability, using metrics like earnings per share (EPS) and price-to-earnings (P/E) ratios to evaluate a company's profitability and valuation.
🔍 Deep Dive into Financial Ratios and Qualitative Analysis
This paragraph delves deeper into financial ratios, explaining how EPS and P/E ratios are calculated and used to compare companies. It uses the example of Donut Dragons and Cupcake Queens to illustrate how these ratios can indicate a company's profitability and value. The discussion then broadens to include qualitative elements of company analysis, such as competitive advantage, management quality, and industry trends, emphasizing the subjective nature of these assessments. The paragraph concludes with a nod to Warren Buffett's investment philosophy, which combines elements of technical, fundamental, and qualitative analysis. It encourages viewers to become informed investors, suggesting they start small, verify information, and consider personal values in investment decisions. Lastly, it promotes a related PBS series, 'Future of Work,' hosted by the speakers, which explores contemporary work-related issues.
Mindmap
Keywords
💡Stock Split
💡Dividend Reinvestment
💡Share Price
💡Technical Analysis
💡Back-testing
💡Moving Average
💡Fundamental Analysis
💡Earnings Per Share (EPS)
💡Price-to-Earnings Ratio (P/E Ratio)
💡Qualitative Elements
💡Investment Philosophy
Highlights
Philip received a Disney stock certificate as a newborn, which grew significantly over decades.
A single share turned into over 50 shares through stock splits and dividend reinvestment.
The share price increased from $1.40 to $35 each, leading to a substantial return on investment.
The investment's return was a staggering 114,100%, showcasing the power of long-term holding.
Julia challenges Philip to pick a winning stock like his grandmother did.
Picking stocks involves more than just gut instinct or social media trends.
Two major categories of stock analysis are technical and fundamental analysis.
Technical analysis focuses on historical price movements and trading volume.
Back-testing is used to identify repeatable patterns in stock price movements.
Examples of patterns include the cup and handle, candlestick, and falling knife.
Moving averages are used to signal buy or sell decisions based on price crossovers.
Fundamental analysis looks at a company's overall strength and financial stability.
Key fundamental indicators are earnings per share (EPS) and price-to-earnings (P/E) ratio.
EPS indicates a company's profitability, while P/E ratio helps determine if a stock is a good buy.
Qualitative elements such as competitive advantage and management quality are also considered.
Personal feelings and values can influence investment decisions beyond quantitative analysis.
Combining technical, fundamental, and qualitative analysis can lead to a well-rounded investment strategy.
Warren Buffett's investment rules emphasize returns, management, and a sensible price.
Investing in stocks is not for everyone, but those interested should start small and verify information.
The goal of stock analysis is to become a more confident and informed investor.
Julia and Philip host a docuseries exploring work-related questions facing Americans.
Two Cents is financially supported by patrons, and viewers are encouraged to become patrons.
Transcripts
- [Philip] When I was just a newborn,
my grandmother generously gifted me a certificate
for a single share of Disney stock to celebrate.
The price? $1.40.
- [Julia] Decades later,
we fished that certificate out of our safe
and did a little research.
Turns out, that little single share had made some friends:
through multiple stocks splits and dividend investment,
we now owned over 50 shares.
On top of that, the share price had grown to about $35 each.
So, in 2007, we sold the shares for around $1,600,
which we ended up putting towards
the down payment on our first house.
- [Philip] All told, I realized a whopping 114,100%
return on that investment.
Way to go, baby Philip!
- Okay, Mr. Boss Baby, don't forget.
That was thanks to your Nana,
but now that you can tie your own shoes
and have all these fancy financial licenses,
do you have what it takes to pick a winner
like she did all those years ago?
- Not only did I learn to tie my shoes,
thank you very much.
But I have also learned that there's a lot more
to picking stocks
than following a gut instinct
or what I see on Reddit.
Today, we're going to explore the tools
you can use to become your very own baby Philip moneybags.
Mustache twirling required.
(playful upbeat music)
- Let's say a certain company has caught your eye.
Maybe they make a product you love,
maybe you keep seeing their name pop up on WallStreetBets,
or maybe you simply work for the company
and have an opportunity to become a shareholder.
Before tapping that Buy button on your trading app,
it might be a good idea to kick the tires, so to speak.
- Most methods of analyzing stocks
fall into two major categories:
technical analysis and fundamental analysis.
They're often portrayed as locked
in an eternal battle for supremacy;
same goal, different tactics.
So, which camp comes out on top?
Let's start by looking at the technician.
- If you've ever seen a day trader at a coffee shop
or those huge stock terminals on TV
with squiggly lines in red and green columns,
then you've seen technical analysis in action.
This discipline focuses on tracking price movement
and trading volume of a company's stock.
What they're looking at are historical patterns,
patterns that will clue them into opportunities
to sell or buy a stock at a profit based on the data.
This often requires extensive research
of past trends,
sophisticated trading models,
and a healthy dose of technology
to execute when they recognize
the signal they're looking for.
- These repeatable patterns
are discovered through something called back-testing.
Back-testing is a critical concept to the technician.
It suggests that specific movements
of the stock price or trading volume
will be repeated in the future.
Here's an example of the cup and handle.
Here's a candlestick
and, of course, the falling knife.
Many traders develop entire strategies
around a single pattern or a combination of multiples.
- But mapping the stock price alone
isn't the only factor they consider.
Another is the moving average.
This is a constantly updating average price
or trading volume of a stock.
One classic use of this particular indicator
is the crossover strategy.
This strategy looks for a share price
to fall below or climb above moving average,
hence, crossover.
They use these shifts as a signal
to buy or sell out of their position.
But crossovers are just the beginning.
Strategies like pennants, flags, or triangles
are other configurations analysts might look for.
(sighs)
Now that our brains are good and scrambled,
let's visit the other side,
the fundamentalists.
- Fundamental analysts aren't concerned
with all the squiggly lines
and fine details of a stock's movement.
Instead, fundamentalists focus on the overall strength
and financial stability of a company.
They ask questions like, how profitable were they last year?
Are they in a strong position
to weather an economic downturn?
Are they currently undervalued?
Obviously, you can't just set a meeting with the CFO
to get answers to these questions.
So, these investors rely on a few specific formulas.
- If you were to do an online search for any company stock,
you'll likely come across two essential,
fundamental indicators:
earnings per share or EPS,
and price-to-earnings or P/E.
EPS for a company is found
by taking the company's net income,
subtracting preferred dividends, if any,
then, dividing that number
by the number of shares outstanding.
The higher the EPS,
the more profitable the company.
Then, if you take their EPS
and divide it into the current stock's share price,
you'll have your P/E ratio.
- These ratios will allow you to compare a stock,
apples to apples
or Apple to Samsung.
For example, let's say you're interested in two companies,
Donut Dragons and Cupcake Queens.
After you run the numbers,
you see that Donut Dragons has a higher EPS
than Cupcake Queens,
suggesting a higher profitability.
Further crunching reveals that Donut Dragons
also has a lower P/E ratio than Cupcake Queens.
Meaning, it might be a cheaper buy.
Analysts use all kinds of creative ratios like this
to help measure the fundamental value
of one company over another.
- I'll admit, the idea that I can just use math
to make money is really appealing.
It gives the individual a sense of control
over something as uncontrollable as an economic market.
And even though these two analytical paths
can help you make a more informed decision,
we can't forget that there are important aspects
to company's health that are neither technical
nor fundamental in nature.
- These are known as qualitative elements.
Does the company have a durable, competitive advantage?
How's the management at the top?
What's their turnover like?
What direction does this company's industry
seem to be heading?
Even if you're able to find some of this out,
the information is going to be interpreted
through the lens of your personal feelings.
Maybe you feel that a company, while booming now,
is ultimately doomed due to climate change.
Maybe after hearing about a leadership scandal,
you decide to sell,
despite what the P/E ratio might tell you.
That's okay.
You should allow space for your excitement
and personal values
to have a seat at the decision-making table.
- So, which of these philosophies ultimately wins out?
Should you lean into technical analysis
or focus on fundamentals?
Maybe qualitative research
is ultimately the most important.
For many investors, professional and novice alike,
These different approaches
actually aren't in a battle at all.
Instead, when used in tandem,
they compliment each other.
- In 2019, Warren Buffett told his shareholders
his three general rules for choosing a company to invest in.
"First, they must earn good returns
on the net tangible capital required in their operation.
Second, they must be run by able and honest managers.
Finally, they must be available at a sensible price."
As you can see, even the Oracle of Omaha
uses a three-pronged approach.
- Now, if all this makes your head spin, that's okay.
This kind of stuff isn't for everyone
and you don't have to do it
in order to be a successful investor.
But, if solving this puzzle
and picking stocks is of interest to you and you have time,
go for it!
Start small and do your own work
to verify anything you might see on the internet.
- The point of all of this
isn't to become some sort of magical stock soothsayer
impervious to losses,
rest assured, there is no such thing.
The goal is to make you a more confident
and informed investor.
- [Julia And Philip] And that's our two cents.
- Quick! Before you go,
do you know what you wanna be when you grow up?
- No matter your answer,
we think you should check out "Future of Work,"
a new six-part docuseries on PBS Voices
hosted by Julia and me
that explores the real, big, work-related questions
that Americans are facing today.
Everything from debt and the gig economy,
to career identity and so much more.
- Check it out!
Link in our description
and be sure to tell them that Two Cents sent you.
(mellow music)
Thanks to our patrons
for keeping Two Cents financially healthy.
Click the link in the description
to become a Two Cents patron.
(playful music)
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