Tradevesting Methodology
Learning the Steps in the Method
When I began investing in the stock market, I didn’t know much and didn’t have a clear path to follow. However, over time, I learned that people who make money in the market have a well-defined process and they stick to that with discipline, conviction and patience. Similarly, I also learnt the nitty-gritties of stock market and developed a method called ‘Tradevesting’.
The ‘Tradevesting’ method includes these steps: looking at the big economic picture (Macroeconomics), examining the industry (Industry Analysis), analyzing individual businesses (Business Analysis), checking financial health (Fundamental Analysis), assessing valuations (Valuation Analysis), and studying price patterns (Technical Analysis).
Macroeconomics
Macroeconomics looks at the big picture of an entire economy. It examines things like the overall production of goods and services, the total amount of money in circulation, the levels of employment and unemployment, and the factors that influence the economy as a whole, such as government policies and international trade.
To analyze the economy of a country, you look at several key indicators to understand its overall health and direction. First, you examine the Gross Domestic Product (GDP), which measures the total value of all goods and services produced. A growing GDP indicates a healthy economy, while a shrinking one might suggest issues. Inflation rates, which show how quickly prices are rising, are also important because high inflation can reduce people’s buying power. Additionally, you look at the unemployment rate to see what percentage of people are jobless and seeking work; high unemployment can indicate economic problems, while low unemployment suggests a strong job market.
Government policies also play a crucial role. Fiscal policy involves government spending and taxes, where increased spending can boost the economy, but high taxes might slow it down. Monetary policy, managed by the central bank, involves adjusting interest rates and controlling the money supply to influence inflation and economic growth. Trade balance, the difference between exports and imports, is another important factor; a surplus can indicate a strong economy, while a deficit might suggest challenges. Foreign exchange reserves held by the central bank can stabilize the currency and manage economic crises, so their levels and trends are important to monitor.
Other factors include the performance of key economic sectors like agriculture, manufacturing, and services, which contribute differently to the economy and face unique challenges. Demographic trends, such as population size and growth, affect labor markets and long-term economic growth. Political and social stability is also crucial, as instability can disrupt economic performance and reduce investor confidence. By looking at these various indicators, you can get a comprehensive understanding of the economy’s strengths, weaknesses, opportunities, and challenges.
Macroeconomic Analysis. Tradevesting Methodology — I | by Ankit Rathi | Jun, 2024 | Medium
Industry Analysis
Industry analysis involves examining factors such as market demand, competition, regulatory environment, technological advancements, and other macroeconomic trends that can impact the businesses operating within that industry.
Industry analysis is a critical part of stock market investment that helps investors understand the broader context in which a company operates. It starts by defining the industry and its scope, identifying the main segments or sub-industries. Understanding the industry’s characteristics, such as its growth rate, lifecycle stage, and market size, provides a solid foundation for further analysis.
Next, investors should analyze industry trends, including technological advancements, regulatory environment, economic factors, and social and demographic changes. Evaluating the competitive landscape using frameworks like Porter’s Five Forces helps identify the level of competition and the power dynamics between suppliers, buyers, and new entrants. Understanding key financial metrics and typical cost structures within the industry also provides insights into its financial health.
Finally, it’s important to identify external opportunities and threats that could impact the industry. A SWOT analysis can summarize the industry’s strengths, weaknesses, opportunities, and threats, providing a comprehensive overview. This thorough approach to industry analysis helps investors identify potential growth opportunities and risks, enabling them to make informed investment decisions.
Due to sector rotation, you can make money in stocks, even in bear or sideways market.
Industry Analysis. Tradevesting Methodology — II | by Ankit Rathi | Jun, 2024 | Medium
Business Analysis
Business analysis involves includes examining various aspects of the company’s operations, such as its business model, market share, competitive position, management team, and overall business strategy.
In analyzing a company for potential investment in the stock market, several key steps are crucial. Firstly, understanding the company involves gathering basic information about its history, operations, and market position. This foundational knowledge forms the basis for deeper evaluation. For example, a company may operate in sectors like technology, healthcare, or consumer goods, each with its unique dynamics and growth prospects.
Secondly, assessing the business model entails examining how the company generates revenue, serves its customers, and plans for future growth. This includes understanding its main products or services, customer segments, and any competitive advantages it may have in the market.
Financial performance analysis is essential to gauge the company’s profitability, revenue trends, and overall financial health. Investors look at metrics like revenue growth rates, profit margins, and return on equity (ROE) to assess how efficiently the company utilizes its resources and generates profits.
Lastly, conducting a SWOT analysis helps identify the company’s strengths, weaknesses, opportunities, and threats. This provides a comprehensive view of its internal capabilities and external challenges, helping investors understand the company’s competitive position and potential risks.
By following these steps, investors can make more informed decisions about which companies to invest in, based on a thorough understanding of their business fundamentals and market prospects.
Neither every metric can be quantified, nor every step can be automated in Tradevesting methodology, like business moat (brand value) can’t be quantified and business analysis can’t be automated.
Business Analysis. Tradevesting Methodology — II | by Ankit Rathi | Jun, 2024 | Medium
Fundamental Analysis
Fundamental analysis involves evaluating a company’s financial health and performance by examining various financial statements. This includes the income statement, which shows the company’s revenue, expenses, and profit over time, indicating overall profitability and growth. The balance sheet provides a snapshot of the company’s assets, liabilities, and equity at a specific point, revealing its financial stability. The cash flow statement shows how the company generates and uses cash from operating, investing, and financing activities, highlighting its cash management capabilities.
Key financial ratios are also essential in fundamental analysis. The Return on Capital Employed (ROCE) measures the company’s profitability and efficiency in using its capital, while the Return on Equity (ROE) evaluates profitability relative to shareholders’ equity, particularly relevant for financial businesses. Other important ratios include debtor days, which indicate the average time to collect payments from customers; inventory days, showing how quickly inventory is sold; days payable, indicating the time taken to pay suppliers; and the cash conversion cycle, which measures the time taken to convert investments into cash flows from sales.
Understanding the shareholding pattern is also crucial in fundamental analysis. This involves examining the ownership distribution among promoters, foreign institutional investors (FIIs), domestic institutional investors (DIIs), and the public. Promoters typically have significant control over the company, while substantial holdings by FIIs and DIIs reflect strong institutional interest and confidence. The public shareholding indicates the level of retail investor participation. Analyzing these aspects helps investors make informed decisions about the company’s intrinsic value and potential investment opportunities.
Fundamental Analysis. Tradevesting Methodology — IV | by Ankit Rathi | Jun, 2024 | Medium
Valuation Analysis
Valuation analysis is to determine if the stock is overvalued (priced too high) or undervalued (priced too low) compared to its intrinsic (fair) value.
Valuation analysis is a crucial process for investors to determine the true value of a stock compared to its current market price. This analysis involves selecting the appropriate valuation methods based on the industry and the specific characteristics of the company. Common methods include the Price-to-Earnings (P/E) ratio for companies with consistent earnings, the Price-to-Book (P/B) ratio for asset-heavy industries, the Discounted Cash Flow (DCF) analysis for companies with predictable cash flows, the Price-to-Sales (P/S) ratio for evaluating companies with low or no earnings, and the Enterprise Value-to-EBITDA (EV/EBITDA) ratio for industries with high debt levels.
To perform valuation analysis, investors gather and analyze financial data such as historical earnings, revenue trends, cash flow statements, and balance sheets. They then calculate key financial ratios and compare these ratios with industry benchmarks and historical data. This comparison helps investors identify whether a stock is overvalued or undervalued. Additionally, considering the current market conditions and macroeconomic factors can provide further context to the analysis.
Ultimately, the goal of valuation analysis is to make informed investment decisions. By comparing the intrinsic value of a stock to its market price, investors can decide whether to buy, hold, or sell the stock. Regular monitoring of financial data and market conditions is essential to keep the valuation analysis up-to-date and relevant. This disciplined approach helps investors manage their portfolios effectively and achieve their financial objectives.
Valuation Analysis. Tradevesting Methodology — V | by Ankit Rathi | Jun, 2024 | Medium
Technical Analysis
Technical analysis helps traders make better decisions by studying stock price movements. It involves using various tools like candlestick patterns, indicators, and different types of charts to predict future price changes. Understanding these tools is essential for anyone looking to improve their trading skills.
Candlesticks are one of the most important tools in technical analysis. Each candlestick shows the open, high, low, and close prices for a specific period, helping traders understand market trends. Indicators, such as moving averages and the Relative Strength Index (RSI), provide additional insights into price movements, trends, and momentum. Common chart patterns like the cup with handle, reverse head and shoulders, triangles, and range patterns are used to predict future price directions.
By learning to read candlesticks, use indicators, and identify chart patterns, traders can anticipate stock price movements more accurately. This knowledge helps in making informed trading decisions, setting entry and exit points, and improving overall trading performance. Practice and continuous learning are key to mastering technical analysis and becoming a successful trader.
Technical Analysis. Tradevesting Methodology — VI | by Ankit Rathi | Jun, 2024 | Medium
If you loved this story, please feel free to check my other articles on this topic here: https://ankit-rathi.github.io/tradevesting/
Ankit Rathi is a data techie and weekend tradevestor. His interest lies primarily in building end-to-end data applications/products and making money in stock market using Tradevesting methodology.
