Recent global turmoil sent the S&P/ASX 200 Index (ASX: XJO) to an 8-month low. This led to many investors panicking and quickly selling off their falling ASX shares.
While the benchmark index has mostly recovered since, it is still down about 3% for the year. This is a stark contrast to the S&P/ASX All Technology Index (ASX: XTX), which is down 16% year to date.
Below, we take a look at some key takeaways published in a Livewire article from Holon Global Investments expert, Tim Davies.
Research your ASX shares investment
The first step before making any ASX investment is to sit down and read the company's financial reports over the past three to five years. This includes both the annual and quarterly results, as well as any third-party information on websites and in newspaper articles.
In addition, it pays dividends to read competitors' reports, and gain a good grasp of the company's products and services.
Davies explains that "many investors may buy shares in Amazon based solely on its successful e-commerce business, but through detailed reading they would learn that Amazon also has 100 subsidiaries across a range of industries including data storage, logistics, food retailing, media, digital TV subscription and financial services".
This is important because revenue from these other businesses could grow and substantially contribute to the parent company's earnings.
Understand the company and its future direction
In the next step, Davies advises that it is best to build a financial model of the chosen ASX company.
This involves using an excel spreadsheet and collating around five to 10 years' worth of published annual and quarterly reports. Key information such as profit and loss statements, balance sheets, and cash flow statements should be in there.
By having this information, you can better predict the future direction of the company. Important metrics include price-to-earnings (P/E), price to sales, earnings before interest, tax, depreciation, and amortisation (EBITDA), and discounted cash flow.
However, it is worth noting that making assumptions beyond three to five years is hard to get right.
Davies noted that another similar model is the implied valuation model. This determines whether the targeted ASX company's shares are cheap. It takes the current share price, then looks at what changes must happen to the company's financial forecasts for it to be valued at the current price.
This tool is handy during bear markets when share prices do not necessarily reflect the future earnings of a company.
The old adage of 'buy low and sell high'
While this seems obvious, buying low and selling high is the ultimate goal of all ASX investors. This can be extremely difficult to achieve though, as you are dealing with the psychology of traders and how they react to daily market movements.
Understandably, market volatility can impact a share price in the short term. However, keeping calm and knowing you have picked a sound company can lead to profitable gains over the years.
Davies said price swings are the norm in today's environment due to a combination of factors. This includes governments exceeding their debt ceilings, intervention from central banks through monetary policy programs, and the fast-paced adoption of technology.
