May 2020 - Navexa Blog

How do you work out which stocks represent sensible long-term investments? We dive into the world of valuing potential investments on the stock market.

With more than 2,200 listings on the ASX, how do you choose a single stock to invest in?

For many of us — especially those of us who hunt for value over the long term — the process begins with valuing a company whose shares trade on the stock market.

It won’t come as a surprise that there are many ways to go about valuing a company.

We all approach investing and building wealth in our own way.

Just as some investors look for high potential growth stocks that could explode hundreds of percent higher in a short time…

And others prefer to buy and hold large, relatively stable stocks for a long time…

There’s a variety of options available to you as you evaluate the value of a potential investment.

Here, we explain a few of the main ones.

First, though…

What Does It Mean To Value A
Stock — And Why Should You Do It?

When you buy shares, you own a fraction of the company whose stock you acquire.

This means that before you buy shares in it, it makes sense that you understand the business you’re buying into.

This, in turn, means you need to delve into the business’s finances.

The phrase ‘due diligence’ refers to this process.

If you don’t know what you’re buying into, then you’re not investing.

You’re gambling.

Your due diligence — the necessary research, in other words — is what differentiates a bet from an investment (which is still a risk, of course, but a calculated one).

Determining a business’s financial health allows you to understand whether or not its share price accurately reflects the company’s value.

The stock market is seldom a perfect reflection of the value of the companies trading shares on it.

After all, everyone in the market is looking for opportunities to make money by speculating on the future.

This means that a company’s shares can easily trade below or above the ‘true’ value of the business they represent.

This is where valuing a stock gets interesting.

Popular Ways Of Valuing A Stock

The simplest measure investors use when trying to get a handle on a stock’s value is the price to earnings ratio, or P/E ratio.

The P/E ratio is the current share price divided by what the company earned for every share over the past year.

Generally speaking, the higher the P/E ratio, the more overvalued you might say a company’s shares are.

A lower P/E, on the other hand, might indicate the market undervalues the shares relative to the overall health of the business.

Other common ways to approach valuation include:

Cash flow: While a stock might not be getting much love from investors and trading cheap, you might fight when you dig into their financials that the business has a strong cash flow (that they make a good return on their spending, in other words). This could be an indicator that the share price will rise higher as the market notices the business making more money in the future.

Debt ratio: Work out how much money the businesses owes to others. Low debt, generally speaking, is a positive sign that a company is healthy and its stock price may rise in the future.

Assets/liabilities: Another helpful ratio to deploy in valuation research is assets/liabilities. This is exactly what is sounds like. Divide the value of the company’s assets by the value of its liabilities. The higher the ratio, the better.

Using Navexa’s Built-In Value Calculator

There are, as they say, many ways to skin a cat.

When it comes to valuing a stock, there’s a huge array of ratios, calculations and methods available to help you get an idea of where a company’s shares are trading relative to its ‘true’ value.

It’s up to you to find the method that best fits your investing style and wealth building goals.

But to make life a little easier for our users when they are trying to value a stock, we’ve built a simple value calculator into our portfolio tracker.

Our calculator uses the discounted cash flow method.

This method determines the value of an investment based on future cash flow.

It’s based partly on hard, current numbers, and partly on predicted or forecast future numbers.

This method is similar to what Warren Buffett uses to value a stock.

If the discounted cash flow works out to be higher than the current cost of the investment, this is an indication that the price could rise in the future.

It’s not guaranteed or 100% accurate. No method that estimates future events can be.

And it is just one of the ways to go about determining value when evaluating a stock.

We recommend you try different methods until you find one that suits you best.

Try ours here!

https://www.navexa.com.au/n/calculators/value-calculator

If you’re looking to stop working for an employer and start your own tech startup, I want to share my experience with you.

I’m going to show you how I combined my passion for technology and fascination with investing into a project that allowed me to quit my job.

I became a full-time professional software developer in 2011.

By 2018, I was making good money and working on multiple side projects.

My goal was to transition away from full-time work and focus on my dual passions:

Founding a fintech startup (two, actually) and building long-term wealth through value investing.

The way it worked out for me, the latter sparked the former.

Let me explain.

I realised in my mid-20s that I wasn’t going to be content working a Monday to Friday job.

I was extremely frustrated working in businesses where I could see so many ways to improve things but was powerless to do so.

Big corporates move at glacial speed, especially in technology.

I wanted to be at the cutting edge of tech. Not another face in a big corporate team waiting for Friday to roll around, again.

And like so many beginner investors, I wanted more out of life than any salary a corporate software gig could give me.

I looked at the phenomenal success of Warren Buffet, for example.

What he had achieved got me hooked on the idea of building wealth by investing.

Buffett’s principles of wealth building appealed to me and I wanted to have a go at applying those principles in my own investing.

I’m a long-term, strategic thinker. Probably more so having spent the best part of a decade embedded in development teams in Australia’s biggest financial institutions.

At that point, I wanted to start a business, too.

But, I didn’t know what — or why — so I put my focus into learning about the stock market.

Using the principles of value investing laid out by Buffett and Benjamin Graham before him, I wanted to be able to carefully analyse, monitor and plan my investments.

And being a tech guy, I went looking for a software solution to help me.

I soon found something that did the job.

You can probably guess what, given that at the time that particular service was the only one on offer in Australia.

So off I went on my journey towards massive gains and stock market wealth!

But I soon found a problem.

The software I was using to track my investments wasn’t what I had hoped for (especially for the price I was paying).

And as a self-confessed software nerd, I quickly started to think I could do a better job.

Why muck around with this sub-par (IMO) solution when I could create my own to better suit my needs?

When I thought about how many people in Australia alone had been investing for many decades, it didn’t make any sense to me that there wasn’t a suite of high quality tools out there to help them.

Specifically, I found it super difficult to get an accurate measurement of my investments’ performance; colleagues and mates I talked to had the same issue.

Many couldn’t even tell me if their portfolio was doing well or not.

That decided it for me.

My next project would be a portfolio tracker that I could use to help me make smarter moves in the stock market.

The idea of using my own tools to help achieve financial success appealed to me a lot.

The idea of turning those tools into a business that helped others appealed even more.

This was the moment I realised how important it was that the project directly benefit me and others in my position.

I relate it back to investing in companies where the CEO has a huge stake in the company themselves.

It means that their success with the company is also success for them personally.

With this idea at the core of my plan, I got stuck in.

Building a fintech application was more exciting, challenging and rewarding than I could have imagined.

It took two things that I have a passion for — technology and finance — and combined them into one thing I could focus on.

One thing that would benefit me and others and potentially become a viable business in the long term.

For me, writing code that translates into making money on the stock market is pretty damn exciting.

I love coding. I’m a proud tech enthusiast. Always have been, always will be.

Those close to me probably regard me as the quintessential obsessive nerd.

And they’d be right. When I get stuck into a project I believe in, I tend to go all in.

At the start, I was still working a full time job at a big corporate in Melbourne and Navexa at night.

I’ve realised over time that what I thought was normal in terms of working on a side project, was not the norm for most people.

I would get home from my full time job and settle in for a solid night of coding before bed.

Lame, I hear you say.

Perhaps, but like I say, when you find a project you’re passionate about both as a business and as an intrinsically beneficial tool, you feel compelled to really dive in.

Even now that I work for myself full time, I’m still keen on coding all night.

However I balance it out a lot more with family time now.

It was around August of 2018 that I decided to work on Navexa full time and finally take it from being a side project, to a legitimate business.

This was also around the time I welcomed some of my first customers into the then free version of Navexa.

This was a milestone for Navexa. It pointed me in the right direction in terms of what the service needed to be for its customers.

I started building mutually beneficial relationships with my customers.

I can’t stress how important that is.

My users contact me directly to tell me what they like and don’t, and what they want from the service.

I had people suggesting features such as supporting cryptocurrencies.

Others were telling me how the user experience of the site could be improved.

I was able to gather feedback fast and implement the ideas just as fast.

I learned that it was crucial to get feedback from people using the service and adapt the product to help them address their pain points and solve their problems.

Why build what you think people want when you can build exactly what they want by listening?

Many of the features that you can see in Navexa today were built off the back of customer feedback.

To those who generously offered their advice and feedback in the beginning — and those who continue to do so — Navexa wouldn’t exist as you know it without you!

A couple of months into my journey, I was presented an opportunity to help start another fintech business with my brother.

This particular business had the potential to make money very quickly. So I decided I would pause my work on Navexa and get stuck in.

This was a very good decision because it gave me an income very quickly which meant I was less likely to need to go back to a full time job.

Then once that business became established I started to resume work on Navexa and work on both at the same time.

Securing starting capital and cashflow while you’re working on a new business is, of course, hugely important. But there are many other blogs out there that go into that specific side of it in great detail!

So, back to my portfolio tracker.

From that point to mid 2019, was a hard slog of getting Navexa into a state where it could be used by most Australian investors.

I spent many months on stabilising the platform, finding bugs and fixing them and adding new features along the way.

By late 2019, about a year after I really started committing my time to this project, the feedback was growing more positive.

But the work was getting more demanding, too.

More features, more users, more ideas I wanted to implement — and limited startup capital to do so with.

It was time to ask my loyal users for money.

The first time you charge money for a product or service is a big moment for any business.

I loved providing the service for free and got a lot of satisfaction in helping customers get better insights into their portfolios.

But Navexa had taken substantial time and capital to create and develop.

I needed to start generating revenue.

In late 2019, Navexa welcomed its first paying customers.

This was a crazy experience.

I’d never done anything like this before. I had never run a website that someone could sign up for and then pay me real money.

The fact that I now had people paying for this service, made me feel an increased sense of responsibility.

I want my paying customers to feel like they are getting maximum value out of the service, so it caused me to strive even harder to ensure they are getting their money’s worth.

This leads us up to now. May 2020.

I’m working on Navexa most days. Building new features, helping customers, fixing bugs and working to spread the word about Navexa.

There is no other other job I’d rather be doing.

I know the next six months will be just as crazy and exciting as the last — more, if early indications are anything to go by — and I’m looking forward to what I’ll learn and the people I will meet along the way.

I have an extensive road map of where I want Navexa to get to.

Like any tech startup, we’re monetizing the work that has gone in so far to offering a high-value, competitively priced service.

With the product the best it has ever been and our marketing efforts starting to yield more revenue, we’re on a mission to grow the business substantially.

The first two years have been the biggest learning curve of my career.

The next 12 months should eclipse that.

Thanks for reading about my journey into the world of fintech startups.

I’m always keen to connect with inspiring, driven people in the technology and investing spaces.

Feel free to connect with me on LinkedIn or Twitter.

What Does It Mean To Value A Stock — And Why Should You Do It?