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A big question not only to small but big and institution investor. How many time you felt that you should have to sold DLF when it was trading at 550 ? or Many time when you sold a stock the price went after immediately and blame it on luck.
So the key question is how do you know it's time to sell ? I was reading this good article on http://www.capital-flow-analysis.com/investment-theory/earnings-per-shar... earning based valuation ..
A stock can be valued based on
1. Earnings
2. Assets
3. Future growth
4. Acquisitions
Depending on industry and sector and state of economy valuation changes. While a Bank stock is valued based on assets and quality of assets and balance sheet, a telecom stock is valued on growth and future income.
What is correct p/e ? Should it be 20 , 20 , 50 ... why some companies have high pe compared to others. Why investors are paying high price for some stocks compared to others. Answer lies in the eye of beholder.
It's not easy job for small investor to find out what is correct valuation is ? Hence I think it's not appropriate to regret a sale r buy decision. This has nothing to do with smartness, shrewdness etc.
There are some very basic principle a small investor can apply to protect themselves..
1. Price to sales ratio: Find out revenue of a company from sites like rediff, sify etc. and look for revenue also find market cap of these stocks
If it's a manufacturing company ,fmcg etc price to sales ratio should not be more than 10 in any case. If price to sales ratio is high stock is getting ahead of itself. Again these are simple principle , sometime it is possible to have high p/s ratio just because we are expecting sales to grow by more then 100%.
2. PEG : Price earning to growth . Look at growth for past 5 years how is company growing per year . If the company is growing ( revnue ) at 20% and stock is rading at p/e of 20 it's a cheap stock based on earning method.
3. Asset Quality of Banks: Almost all banks are growing . Key is how good is asset quality . If a bank is just distributing loans without worrying about collection , we have trouble here. There is no simple way to find out, use your own practical experience to find out which bank is better.