Method 1. Deep equity research
- How: Series of comparative analyses. Industry by industry.
- What: Identify standard characteristics of an industry. Find the outliers.
- Next: Study the outliers in detail. Both qualitative and quantitative factors.
Method 2. Wide stock screening
- How: Quick glance at hundreds of snapshots.
- What: Pick 5 or 10 that look interesting. From an earnings or current-assets standpoint.
- Next: Study them. Both qualitative and quantitative factors.
Method 3. Superstars. Volatile markets
- Find normal level: 7 year average earnings of BSE Sensex or NSE Nifty * 2 * 1/bond rate.
- Buy: Start buying diversified portfolio at 20% discount. Buy more till 33% discount.
- Sell: Start selling at 20% premium. Exit when 33% premium.
Method 4. Unknowns. Or falling earnings. Normal markets
- Look for high earnings (current and average) vs price.
- Or high net assets vs price + satisfactory earnings.
- Be alert and apply judgement to ensure at least average future prospects.
- Avoid during bull markets.
Method 5. Unknowns. All market conditions
- Hunt for grossly undervalued stocks at all times.
Method 6. Spooked by bad news
- Compare stock price decline vs. true damage from the bad news.
Method 7. Dumped in bankruptcy
- Find cases of protracted bankruptcy proceedings.
- Wait out the initial speculative period marked by high price compared to probable ultimate value.
- Determine approximately the best time for making a commitment in them. i.e. keep comparing price with intrinsic value.
- Don’t try to time to perfection. Being several months early is okay.
Method 8. Arbitrage.
- Relative prices of securities out of whack.
- Study the contractual relation.
- Consider exchange or hedging.