How do I buy stock more skillfully?

If your time frame is short to medium term, up to a year or so, you will want to identify “technical indicators” such as trend lines, support and resistance levels, oversold & overbought indicators, and so on. When buying based on technical analysis, it is best to identify when the price is in a longer-term uptrend on the chart, but recently has sold off on lighter than usual volume and has bounced off a support line or has RSI below 30 in the past few time periods.

For investment purposes, not trading as illustrated above, you want to identify a company that you can plainly see and explain what they do and why you think it might be good. Once you do that go look for the company’s past EPS growth rate for the past few years. You want to be finding companies that can grow faster than the average company, which is between 4–7%. You want companies above 10-12%. That’s the easy part. Identifying the above-average companies and paying a reasonable price for them is an entirely different ball game.

You can afford to pay a slight premium for a superior company, but more times than not, investors pay way too much for the modest increase in growth that the company will achieve. The best way to approach this is to take the forecast earnings growth rate and only pay a PE ratio equal to that growth rate, or no more than 15 PE. If a company is expected to grow at 12% to pay a PE of 15 or less, and you are paying a pretty reasonable price. If the company is expected to grow at 20% then a PE of 20 or less would be a good rule of thumb. Anything more, and you are buying future dollars at an overvalued rate.

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