Last post I talked about finding value in the share market, using indicators such as EPS & P/E ratio. This week I’d like to have a quick look at managing your risk.

If you are looking at investing for the longer term it’s important to do the research. It can be very tempting sometimes to be drawn in by a share with an extremely volatile graph that looks like it could make a big profit in a short time. However a graph is not enough for me to make a decision.  Generally when I am buying a share in a company I like to be able to write a written response to the question ‘Why am I buying this share?’

If I can’t come up with a response, with statements and evidence on why I think a share is a good buy then I won’t proceed with the transaction. Basic things I look for are:

  • Is the company actually turning over profits?
  • Is the share worth the price I’m paying?
  • Does it have consistent EPS & profit growth?
  • Does it have a decent amount of cash to support it?

Other things I keep in mind are diversifying within my portfolio and making sure I keep my profits and losses consistent, using a stop loss.

Once again, these principles are only a guide and are no guarantee, but they are principles that I myself find fairly reliable.