How do you value a stock?
The answer to this should be consistent with the investment philosophy.
For example, one portfolio manager describes a value approach in which he spends most of his energies on valuations, using three different valuation methods.
In the growth camp, however, another portfolio manager spends very little time on valuations:
"The market chronically under-values companies that grow for an extended period of time. And if a company stops growing, it doesn't matter what the price-earnings ratio is—it's going to go down a lot. Not to be glib about it, but we don't find valuation tools to be very helpful in assessing the attractiveness of growth companies."
What non-financial characteristics do you examine?
Many portfolio managers find it important to go beyond the statistics of the companies in which they are investing, to help understand the company and its operating environment.
For example, one fund manager describes her examination of corporate management as follows:
"I need to know what a company's strategy is, what its plans are, and then I look at their record. I assess the probability of whether they can achieve what they say they are going to do, and then we track them to see if they do it."
That approach is, in fact, what a prospective mutual fund investor needs to do with a fund manager.
Continue to Step 4 »
