Stock market probability of earning

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Rishi Kashyap
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Stock market probability of earning


Stock investment is not an exact science but more of probability.

Stock market probability of earning
Your success is determined not only by how accurately you judge value of stock but also on your ability to correctly understand the probability of share performance in future. Share Market beginners miss this important point !

In this chapter of share market tutorial we will learn basics of improving on our Stock market probability of earning. An important equation below tries to explain this probability in simplest terms.
Stock market probability of earning

(Probability of gain X Amount of possible gain) - (Probability of loss X Amount of possible loss) = A positive number

Below is not a comprehensive list but it gives you, a kick start, to understand and make calculated predictions about share of a company before investing in that company.


Rishi Kashyap | | EDIT

Rishi Kashyap
8.69 K
X Is the Company Consistent ?

In how to value stock we learned to put a price tag on a share of company.
Most websites give you these details basis only last year performance, however a consistent company is always preferred more than an inconsistent company !

In simple terms a company who is consistently performing on required Financial Ratios for 5 to 10 years is much better to invest than a company which has performed only for last 1 to 2 years. The longer this consistency record is maintained the more is its probability of performing in future.

Presently our stock market report gives only 3 years details, however, after finding undervalued stocks, we highly recommend to do the financial statement analysis of each company for at least 5 to 10 years.

Rishi Kashyap | | EDIT
Rishi Kashyap
8.69 K
X Circle of competency

For many years I thought that, since I am in merchant Navy shipping stocks falls under my circle of competency.
As I stayed and survived in Share Market, read Investment books, I realized that this was not the case, while your profession may give you an insight of that field, we as an employee rarely see the bigger picture seen by a stock investor !

What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence.
The size of that circle is not very important; knowing its boundaries, however, is vital.

Mr Warren Buffett
As I kept learning I realized that I am more comfortable in understanding companies which are into manufacturing and technology than shipping or financial institution companies.
Circle of competency
I still find financial institutions, Banks and Non-Banking Financial Company (NBFC) financial statement analysis difficult to understand.
Balance sheet statement and Cash flow statement of manufacturing companies, specially consumption based companies are comparatively easier  to understand ! They, because of their simple nature of business, are also easier to predict performance.

Whenever I shamelessly accept my lack of knowledge with such companies, many friends immediately state "Oh then you will miss shares like HDFC Bank and Bajaj finance service !"
I blatantly admit YES but there are some multi-baggers undervalued stocks, I have found on my own too !

So my simple rule is  never invest in companies which I do not understand and is beyond my circle of competency !

Obviously Investing in companies which you understand, industry which you understand will improve your Stock market probability of earning.

Rishi Kashyap | | EDIT
Rishi Kashyap
8.69 K
X Margin of Safety

Even if the company is consistent and you have done a good valuation of the company, share price may fall and company performance may get affected by short term incidents or a bear market.

If the investing price of the share of a company is very close to its expected valuation, it may still be risky to invest, as some unforeseen events, like corona, may effect companies estimated revenues.
So you want to buy the company much under value to your valuation price.

A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.Mr Seth Klarman
   Margin of Safety
Margin of Safety : This is the difference of actual undervalued buying price and estimated intrinsic value of stock .
While Mr Ben Graham recommended to buy shares at 1/4th or 25% of its estimated intrinsic value, you will rarely get such prices these days. This does not mean that you will NOT get it, it just means you have to be patient and wait for low PE Ratio stocks.
If you buy stock with a sufficient margin of safety, the probability is with you.Li Lu

The other way to look at Margin of Safety is that it corrects for your Margin of error in estimating its valuation !

There are many who believe in the Efficient Market hypothesis which in simple terms means that share price will reflect and get corrected to the information available to all and thus it is very difficult to "BEAT THE MARKET", however value investors have proved them wrong many times.

With this new learning, let us modify our
Thumb Rules for Stock Investment
  1. Default mode is DO NOT INVEST
  2. Verify Financial statement source of Information. Best is to do financial statement analysis personally.
  3. If you do not understand the financial statement, safely switch to default mode, DO NOT INVEST. Period !
  4. Check Financial ratios for fundamental analysis, if not sure, switch to default mode, DO NOT INVEST.
  5. Cannot value a stock, switch to default mode,  DO NOT INVEST.
  6. Cannot determine probability of earning, NO Margin of Safety, outside your Circle of competency, DO NOT INVEST.

Margin of safety is just 1 factor of many factors which can improve your Stock market probability of earning, in coming chapters of Share market course tutorial , we will detail some more. For now let us see how to find undervalued stocks.


Rishi Kashyap | | EDIT