Ten investing truths

Find hidden value                                                                        

 

Remember when he was undervalued?

Most European football clubs search for new players from famously talented countries like Argentina or Brazil, making it more remarkable that Leeds United should find Harry Kewell 15 years ago in the Sydney suburb of Smithfield.

Time has revealed they got a bargain. It's the same with investing when trying to discover the next rising star before the rest of the market. By researching companies beyond normal boundaries we gain unique insights and greater understandings. Information that is crucial in assessing a company's weakness, risks and hidden value.

 

In this way, it is possible to find the Microsoft or Sony of tomorrow and, with patience, multiply your money many times over.

Hidden gems are every investor's dream. Legendary US value investor Peter Lynch dubbed these investments "ten baggers" - shares that grow from small companies into market heavyweights and increase in value tenfold - or more.

Let's look a few examples of "ten baggers".

  • Giant US retailer Walmart was founded in 1962. A thousand dollars invested in Walmart in 1970 would now be worth more $5 million dollars.
  • A thousand dollars invested in Microsoft on the day of its sharemarket listing on March 13, 1986, would now be worth $250,000 - a 33.8% annual return (as at 1 March 2005).
  • Hearing implant company, Cochlear was listed in Australia on 4 December 1995. A 1995 investment of a thousand dollars would now be worth $10,300 - a 28.7% return per annum (as at 1 March 2005).

Your return will be higher - and your risk lower - if you invest in companies that are selling for less than they are worth.

The question is, how do you find them? If it were easy, everyone would be doing it. The problem with hidden gems is that they have their own risks. For every Cochlear there are hundreds of Compass Airlines.

Know what influences stock value

A whole range of factors affect companies and their share prices - some they control and some they don't. You need to understand a company before you can decide, "is this share worth what I'm paying for it?"

Smart investors consider what affects company value before they buy or sell a share - and so do fund managers who use a systematic approach to assess a company's potential.

Know where to look for opportunities

Here are two potential ways of discovering the gems of tomorrow's market.

 

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