Originally, we were interested in doing something with the
stock market and the finance sector in general. Since we had a level of
knowledge in economics and finance, and because of the general economic
condition of the United States, we first decided to look at the relationship
between stock market fluctuations and the economy. However, we quickly found
that issue to be outside our scope of knowledge, and decided to look into the
causes of market fluctuation. This led us to contemplate the reasons behind the
fluctuation of stocks in general, posing a question of what makes price go up
or down every single day. Naturally, we became interested on how people make
money in the stock market. We began to research, and got bombarded with an
overwhelming supply of information, very few of it providing us with a clear
picture of the world of investing. We needed to narrow down our audience to see
at what level we would be writing this paper. Eventually, we decided to write
this paper to Tony, mentioned in the background, who is a beginning investor
and knows nothing about the market or stocks. We decided to keep one question
in mind above everything else. How does one make money in stocks? We started
looking at some of the world's greatest investors such as Buffett and Graham.
Eventually, after further refinement and research, we came up with our problem
statement. Based on the insights from some of the most successful investors,
how does one understand the market, and find and research successful stocks
which provide a decent rate of return compared to the amount of risk the
investor can afford?
Exploratory Research
After contemplating our problem, we came to understanding
that the nature of it is unstructured. The reason we came to this conclusion is
because the problem seemed to be not well understood. It's obvious that the
stock market and all the stocks on it fluctuate on a daily, even a minute
basis. However, what causes them to fluctuate, and more specifically what
causes some investments to double or triple in value while others fail
miserably, seemed to be a mystery. Furthermore, we wanted to look at how people
that have successfully beaten the market over the years were able to know which
stocks would succeed and which would fail. Knowing that the solution would not
be simple, and the answers could be numerous, we knew we had to look at several
sources and several ways of investing to come to our conclusions. We also knew
that the direction of our research could change based on our findings.
Therefore, we chose to utilize the Exploratory Research methodology. By
examining and analyzing strategies of successful investors as well
understanding how to find a great company that stands behind the stock symbol
by using ratios and fundamental valuations, we hope to arrive at our proposed
strategy.
Frame Of Reference
We know nothing of stock valuation or market fluctuations. We
do understand however that the people who have successfully beaten the market
over a long period of time have had a system for doing so that worked. We hope
to provide a theoretical strategy based on our observations and the
recommendations of the world's greatest investors as well as valuation books
that will try to beat the market. We do understand and assert that this
strategy would be theoretical and only a conclusion of our research and
deductions. In addition, we do understand that the market can be irrational and
unpredictable and that this strategy will not guarantee a positive return
percentage all the time. However, we do believe that by picking companies with
solid fundamentals and holding them for long periods of time will provide a
great way to earn a good amount of return in the stock market.
Data Collection
Since we are using the exploratory model, most of our data
comes from secondary sources. We have used several internal and external
sources. External sources used for this paper include books and articles, while
internal sources consist of stock research reports from the Standard and Poor
Corporation as well as Reuters Research Reports.
At first we were building from our existing knowledge of
finance, however that turned out to be insufficient. In order to find more
information, we turned to libraries, such as the LIU library and the DePaul
University library. We have been able to obtain several books that described
the investing style of some great investors as well as several books on
analysis of different securities. We used these to build our knowledge of
valuation formulas, as well as to provide information about the strategies of
the great investors. We have also turned to the internet for sources. There are
several investing websites which were especially helpful for explaining
different ratios and what they mean and how they should be looked at.
For explaining core earnings, we looked at primary sources
from Standard and Poor's in a document describing the reason for creating these
measurements. In order to collect our primary data, we have also used S&P
reports to collect different ratios and key fundamentals. We have used the
inductive way of collecting data. We have first observed and researched,
looking at some major ways of investing that exist, then took general
conclusions from our research and created our theory.
Analysis of Data
In analyzing data, we have tried to concentrate on what are
the similarities between the investing styles of the great investors that we
have researched. We have also looked at internal documents from the S&P for
an explanation of core earnings in order to understand their importance and
implementation. For evaluation by formulas, we have tried to pick the most
important formulas and to try to organize them first by the financial
statement, and then, in our strategy by importance so that the investor who has
less time on their hands will be able to skip the highly detailed and in depth
valuations that our strategy proposes. From the information we have gathered,
we have taken the main points and provided them in this paper. We have tried to
limit the formulas that we use to only the most important ones and ones
essential for analyzing companies' performance. For the investors, we took out
their main philosophy and investing strategy and summarized them here. We have
departed from data, and using the qualitative information we have gathered and
analyzed, we have created a theory.
