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February 29, 2008 Buy or Sell?
The concept of buying low and selling high could be the most clear-cut theory in finance and simultaneously the most difficult to execute. It is the goal of every investor to maximize their return on an investment by waiting for just the right time to buy and sell. With the volatility currently being displayed in the market and the possibility of a recession looming on the horizon, the question of timing is even more evident. So how can an investor decide if a stock is attractively priced in the current market? It is a question that will most likely never be answered with concrete certainty, but there are questions an investor can ask that can increase their success.
There are three basic questions that underscore the most fundamental, capital-based way of analyzing a company's finances and value. How much capital is a company using? What is its return on capital? How much does the capital cost? These questions may seem basic but they serve to shed light on how well a company is doing at its most basic task, which is earning a return on its capital that's greater than the total cost of that capital. Answering these questions is the key to evaluating corporate performance. Comparing the information to historical trends and industry peers can allow an investor to get an idea of the current market and could greatly increase the odds of making the right decision regarding the most frequently asked question in finance. Should I buy or sell?
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