What's the right price to enter?

Investment Learning
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I am a beginner with somewhat basics in place.

I want to understand the timing of buying a stock. I know that there cannot be a perfect timing. But there has to be some timing to enter which gives decent or substantial gains. Like RVNL the stock rallied on back to back sessions and continuously touched new all time highs and stopped at 345. Since the results have been out, it is constantly hovering at mid 250-270 levels. Post the rally and the current stability, it is now understood that it was hyped before its result.

Now my question is how to access that a stock is over priced or at the correct valuation. I understand the logics of PE, PB ratios etc… but sometimes the stock sustains even at high PE ratios!

Any guidance on this shall be helpful :pray:

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When you talk about timing, entries, gains and rallies, you are a trader, not necessarily an investor. So you have to have a trading system to capture such stocks. Find sectors in momentum, find stocks in momentum, buy as per certain criteria, ride the tide, and get off as per the plan, not to mention the stop loss. Valuations do not come into picture, as these are trades.

If these are investments, even technofunda bets, then FA should be added, there is a whole forum for this.

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Study can be helpful to you. Any good book on value buying will make you money. Nobody can predict the price of a stock but our conviction to remain in that will come from studying company.
Thank you. : :+1:

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Basic fundamental question is why stock price is rising? If you find the answers for this question then you came to know what is the right price to enter.
Basic fundemental of rise in stock price is due to technical & fundamental of a company.

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Sometimes its just market expectations that the results shall be good and hence there is a good boost up before the results. Then when the results are not in line with the expectations, the stocks takes a dip.

I understand the fundamental and technical aspects but the point is if we have entered at the boosted up price… and it goes down…no problem so as to exit at a profit…but the issue is how long should one wait? Like Laurus Labs, I bought at 600 in early or mid 2022 and then it fell rapidly and now it is at 400 levels.

So how to derive that the stock is overvalued or undervalued even from investor perspective with holding period of 2-3 years.

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~ frankly speaking, its a subjective arena to dive into.
~ there are a gazillion different versions on what you mean by buying at right price, although fundamentally it means buy the low sell at high (it doesn’t mean you need to capture the exact entry and exits).
~ market is a playground for everyone. you can make money until you are disciplined and rigorous enough.
~ you can follow technicals and make lots of money and same with value investing, same goes for growth investing, short selling, trading and so for every other strategy…
~ the only thing that requires from your end is utmost respect for the market and discipline to pursue this journey

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Try Reading books.Start with “one up on Wall Street” by Peter Lynch.Read valuepickr threads. Read some exceptional old threads of this forum.Consider this forum as a book.Try to see the process rather than coming directly to conclusion.If I can do it,anybody can.

Lifelongstudent

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Good question and quite often they are no good answers to the good questions.

I’ll just share a perspective instead of offering you a formula to figure out the right price to enter a stock. (If I knew the formula I would probably have a bestseller on my hand.)

In principle your idea of looking at valuations is right.

To quote Mr Buffett, margin of safety, difference between value of a company and its stock price, should be a key factor in influencing your decision to invest. If you know how to value a company you can easily figure out whether a stock is undervalued, fairly priced, perfectly priced, overpriced or insanely overpriced.

But valuing a company is never that easy. Valuation metrics might tell you how a company is currently valued relative to its financial performance till present day but whether it is good or bad depends on what market thinks is going to happen to the company in future.

A company growing its earning at 30% year on year may be seen as fairly valued even at a p/e of 60 if market believes that earning performance can be sustained. Conversely, a company with the similar earning performance might be seen as overvalued even at a lower multiples if market doesn’t believe in its long term growth prospects or the sector company operates in.

This is what then happens. Since no one really can see the future, investors try to build a narrative around a stock based on different data points they have about the sector and the company, management commentary and company’s ability to execute on their promises among a host of other factors. We start seeing big moves in stock prices when continued pushing of narrative and sustained price momentum attracts more and more buyers to the stock.

If you saw RVNL or SJVN stocks going up despite unflattering quarterly numbers it could be that market has heavily discounted a lot of exciting future into the current price or exploited the euphoria surrounding the stock.

So if you are not comfortable betting on a stock purely based on the narrative or don’t have time for excessive research to validate that narrative, it is better to find the businesses where you are certain about a company’s long term prospects based on their past performance and don’t find price scary.

You may not perfectly time the entry price and might enter a stock at higher levels but in the long run you will still make money (of course with some luck).

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@Hemant_Kumar2. Thanks for the detailed response. Opened up the company valuation piece for me to explore. :blush:

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@Surender Thank you.

Yes…i agree it is a continuous process and the learnings along the way shall pave the way forward! The self doubt which you spoke about, has bitten me hard post some experiences like RVNL and Laurus Labs. Hence thought of asking the experienced lot.

Once again thank you so much :pray:

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A few quick checks, on top of the fundamental analysis, that I’d recommend to do to identify buying opportunities.

1- Compare current multiple with historical averages (say last 10 years). Any big divergence should merit further investigation. If current multiples are way higher than the historical and you can’t attribute that to any structural changes in fundamentals then better leave the stock alone. Likewise lower multiples than historical averages should also be investigated as they can often offer great buying opportunities (e.g. ITC in 2022).
2- Do the same comparison vs peer group. Is the stock valued too low or high compared to the peers? Again there could be a buying opportunity if stock is valued way too lower compared to the peers and you can’t fully explain the divergence based on the fundamentals (e.g.until a year ago some psu bank stocks were trading at less than the book which led to upward price correction).
3- Look at stock price/EPS growth ratio over the years. Ideally the trend should be close to 1 which means stock prices track the earning performance. A ratio lower than 1 should be investigated.
4- For cyclical stocks, look for signs of margins topping and bottoming out as they follow a peak and trough pattern and cyclical stocks correct or rally massively depending on where they are in the pattern.
5- Do the same for earnings for cyclical stocks. Peak earning performances over a few quarters drive down multiples even after massive surge in prices creating giving an illusion of valuation comfort.
6- Look for turnaround stories where sustained topline growth or debt reduction or reversal in market cycle lead to paring of losses bringing a company into profitability.

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Always try to protect the downside first.

  1. Check operating cash flow and debt
  2. Then check valuation parameters which depends on either book value or sales as a vast majority of companies are cyclical

If both parameters follow then check technical and previous results. If previous results are constantly bad and technical is bad do not buy. If previous results are bad but technical is good then do more research. If previous results are good but technical is bad then wait for rounding bottom up. If results and technical are both good but if cheap.
A lot of it depends on mindset also, navigation through share up and down is like navigation through life. Read Gita by (Swami Chinamayanada - VHP founder) or buy his video cassette to learn this. Chandrakant Sampath and his disciples like RK damani all attest to this truth

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