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View Full Version : What level of financial literacy should one have before entering the share world ?



toast2success
15-12-2013, 07:50 AM
When looking at investment books there appear to be lots of formulas and equations . Usually one can read and reread the definitions and hopefully grasp to some degree what the formula is for.

But being formulas, equations, ratios etc, what kind of level of financial literacy should one hold ?
Is basic high school math enough ? or should one know how to find future and present values? nominal interest rates? real interest rates ? etc or is this kind of stuff in the it's nice to know, but not essential category'

Halebop
15-12-2013, 09:25 AM
Ignoring quantitative and algorithmic approaches to trading or investing, my feeling is the common sense and commercial acumen mean more. Only a little math is required to master the basics. However I do think mastering the logic public company financial statements can add value.

noodles
15-12-2013, 10:55 AM
For fundamental investing, I think you need to understand:
pe ratio's (and how to calculate it from a P&L)
dividend yield
debt/ebitda (what it means and how to calculate it from a P&L / BS)

Therefore high school accounting would be a must.

You need to understand what affect rising interest rates with have on the stocks you own.

If you are using a broker to help you select stocks, perhaps this is less important.

born2invest
15-12-2013, 11:26 AM
Therefore high school accounting would be a must.


Couldn't agree more. If you aren't too flash and can't read profit/loss and balance sheet I suggest going to a night school/community college or NZ share investors association educational courses.

A bit of basic economics is good too.

The hardest thing to learn is patience and temperament.

artemis
15-12-2013, 12:34 PM
Don't forget you don't have to know everything before dipping a toe in the water. My first (small) share purchases were based on a woeful lack of knowledge, but once invested in a couple of companies my interest in their accounts, announcements and the business press increased rapidly along with interest in other companies in those sectors.

Snoopy
15-12-2013, 03:50 PM
When looking at investment books there appear to be lots of formulas and equations . Usually one can read and reread the definitions and hopefully grasp to some degree what the formula is for.

But being formulas, equations, ratios etc, what kind of level of financial literacy should one hold ?
Is basic high school math enough ? or should one know how to find future and present values? nominal interest rates? real interest rates ? etc or is this kind of stuff in the it's nice to know, but not essential category'

I never studied accounting at school. I did do maths though. I would say that if you studied what would be now year 12 maths, that should give you enough of a skill toolkit to pick up the management accounting that is needed to study investments. None of the stuff that appears in annual reports is really rocket science. Of course like any new skill, some application is required to achieve proficiency!

SNOOPY

Schrodinger
04-01-2014, 09:55 AM
Quick and dirty financials:

For established businesses...

High profit margins are what I look for (More than 20% Net for me is preffered). Bonus if they have been consistently increasing over 5 years. Check out the RAK chart vs BHP in Aus. High margins are very important but also one of the most difficult things for a company to keep. The best will have a very good moat protecting them. Avoid long established companies who cannot make a profit. Unless there is a very good reason or a bad year (excuse) this will save you some heartache.

This doesn't mean I will invest in a company with great metrics (fully valued?) Everyone knows a good company through the numbers. I am a value investor that looks for a bargain and turn around story.

Share price to Net tangible assets is a good one to watch out for. Is it below 1? Although not directly tied to market cap this is an accounting measure of firms worth. I generally glance at the market cap to see its historic trend as well. For the value investor this can be useful for a turn around story.

Return on equity is linked to profits and a very good benchmark to compare a company to its peers. Pull of the Huntleys reports in Asb/commsec and look at the numbers of the best performers over a 10 year period.

Strong and consistent revenue growth.

Has this company been growing through acquisition or organically. Favour the organics.

For growth companies...

Look at the sales growth rates. This is a market share race. The best will have rapid sales growth and RETAIN their hard won customers.

Understand when they expect to become cash flow positive. This will indicate when dividends should start flowing.

You will have to research thoroughly usually about their competitors, geographic regions, marketing approach, sales channels, product etc. I emphasise marketing again. What does the website look like? If you can, trial the product yourself and see what it is about. For a software business is all the training done online? Do they need to get involved in the sales process or is it electronic. Check their different websites to get a feel for the differences in countries.

Pay attention to who has money invested at the early stage Winkler/Theil Xero is a good example.

Finally this all needs to be taken with an timeframe in mind. If you have difficulty with setting one put in a CAGR measure to make your sell decisions easier.