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Many people consider investing money in a significant global economy just like the US. This can be achieved with the S&P 500 stock index of over 500 first-class US companies. That doesn't seem just like a lot set alongside the roughly 5,000 stocks traded on the US market. However, these 500 companies take into account around 80% of the total capitalization of the US stock market. 

The Standard & Poor's 500 is the primary US stock indicator. Its performance influences the GDP of exporting countries and wage growth in addition to many derivatives. The entire world tracks the index daily.

As for the companies (components of the S&P 500 index), everybody knows and uses the services or products of the companies, those types of are Microsoft, Mastercard, Google, McDonald's, Apple, Delta Airlines, Amazon and others. In the event that you spend money on securities of such major US companies, it may be the best investment you can make. 

Could it be difficult to create a profitable stock portfolio all on your own?

Indeed, it will seem something unattainable for a non-professional.  Anyone desiring to start investing will need extra money, understand and read company reports, regularly make appropriate changes within their portfolio, monitor market share prices, and above all, decide which 500 companies to purchase at the start of their journey being an investor. Yes, there are some issues, but they are all solvable.

Share price. This really is the price tag on a company's share at a point in time. It could be a minute, an hour or so, a day, a week, per month, etc. Stocks are quite an energetic instrument. Industry is unstoppable, and price will be higher or lower tomorrow than it's today. But how do guess what happens price is sufficient to purchase, whether it is expensive or not or maybe you ought to come tomorrow? The solution is straightforward, there are financial models for determining what is called fair value. Each investor, investment company and fund has its, but in the middle of the complex mathematical calculations can be quite a DCF model. There are lots of articles explaining DCF models and we won't get into the calculations and examples. The key goal is to find a currently undervalued company by determining its fair value, that is later converted to a cost per share. We make daily calculations and find out the fair prices of all the different parts of the S&P 500 Index centered on annual reports, track changes in the index and update the data.

Investment algorithm. 

For the forecasting model to work nicely, we need financial data from companies' annual reports. We process this data manually, without using robots or automated systems. That way, we dive into the companies' financials completely, read and discuss the report, then feed that data into our forecasting model, which determines the fair price. It is important to have at the very least 5-year data and look closely at the dynamics of revenue, net income, operating and free cash flow. The decision to possibly invest in a company comes only after determining the company's current fair value and value per share. We consider companies with a potential in excess of 10% of fair value, but first things first.

Beginning. So, the company's annual report arrives today. The report should be audited and published by the SEC (Securities and Exchange Commission). Based on section 8 of the report, we make calculations in our model, substitute values, calculate multipliers, and finally determine the fair value. By all criteria, the organization is undervalued and right now the share value is much below the calculated values, let's go deeper into the report.

Revenue. Let's look at revenue dynamics (it is a significant factor). Revenue has been growing going back 3-5 years, it would be ideal if it's been increasing year after year for ten years, nevertheless the proportion of such companies is negligible. We give priority to revenue in our calculations—no revenue - no need to include the organization in our portfolio. We pay attention to possible fluctuations. Like, throughout the pandemics (COVID-19), many companies from different sectors have suffered financial losses and the revenue decreased. This really is an individual approach, with respect to the industry. The most effective option: revenue growth + 5-10% over the last 5 years.

Net profit. We look at the net profit figure, and it's good if additionally it grows, however in practice the web profit is more volatile. In cases like this the important factor is that company has q profit, rather than loss, that is 10-15% of revenue. Obviously, a strong decline in profit would have been a negative factor in the calculations. The most effective option: a profit of 10-15% of revenue over the last 5 years.

Assets and liabilities. We visit the total amount sheet and observe that the company's assets increase year after year, liabilities decrease, and capital increases as well. Cash and cash equivalents are increasing.  We pay attention to the company's overall debt, it will not exceed 45% of assets. On one other hand, for companies from the financial sector, it's not critical, and some feel confident with 60-70% debt. It is all about an individual approach. We consider only short-term and long-term liabilities, credits and loans, leasing liabilities. The most effective option: growth of company assets, total debt < 45% of assets, company capital a lot more than 30%.

Cash flow. We are immediately thinking about the operating cash flow (OCF), growing year by year at an interest rate of 10-15%. We look at capital expenditures (CAPEX), it could slightly increase or remain the same. The primary indicator for people will be free cash flow (FCF) calculated as OCF - CAPEX = FCF. The most effective option: growth of cash flow from operations, a slight escalation in capital expenditures, and above all, annual growth of free cash flow + 10-15%, which the organization can devote to its further development, or for example, on repurchasing of its shares.

Dividend. Apart from anything else, we have to pay attention to the dividend policy of the company. All things considered, we want it when profits are shared, even just a bit, for our investments in the company. If the dividend grows from year to year, it only pleases the investor. In addition, the general return on investment in companies with a dividend should increase. Many investors prefer a "dividend portfolio," buying 15-20 dividend companies with yields of 4-6%, in addition to the growth in the value of the shares themselves. The most effective option: annual dividend and dividend yield growth, dividend yield above the common yield of S&P 500 companies. how to invest money in stocks

Multipliers. Moving on to the multiples of the organization, they are all calculated using different formulas. When calculating exactly the same multiplier, you can use several formulas with an alternative approach. We have a tendency to lean toward the average. The critical indicators would be the 3, 5 and 10-year values. The index for ten years has the best influence in the calculations in addition to the annual. In today's economy, we consider 3 and 5-year indicators to be the most crucial ones.

How many multiples is enormous and it creates no sense to calculate every single one of them. We should take notice only to the major ones. One of them are Price/Earnings ratio (P/E), Price/Cash Flow ratio (P/CF), ROA and ROE, Price/Book (P/B), Price/Sales, Enterprise Value/Revenue (EV/R), Tangible Book Value, Return on Invested Capital (ROIC). It is necessary to check out these indicators in dynamics over 5-10 years. The most effective option: price/profit and cash flow ratios are declining or are at exactly the same level (these ratios ought to be less than 15), efficiency ratios are increasing year by year and moving towards 30, other ratios are above average in this sector.

This can be a small set for investors. Obviously, there are many indicators in a company's annual report, the important ones include operating profit, depreciation, earnings before taxes, taxes, goodwill and many others. We prepare the key and most critical financial indicators, you can save lots of time and research all companies in the S&P 500 Index.

Now we have a broad idea about the financial health of the company. We made some calculations in our financial model, where we determined the percentage of undervaluation right now and made a decision whether to purchase shares of this company or not. You will find no impediments. Allocate 5-8% of one's available budget and purchase the stock. Make sure to diversify your portfolio. Buy undervalued companies, 1-2 in each sector. You will find 11 sectors in the S&P 500. Choose only those companies whose business you recognize, whose services you utilize or whose products you buy. Don't rush the calculations in your model, if you are uncertain, do not spend money on this company.

Surprisingly, an undervalued company may not reach its value for an extended time. The dividend paid will increase the situation. Watch out for companies with information noise. Generally, they talk a lot but do not do much.
The S&P 500 index of companies has been yielding a typical annual return of 8-10% for many years. Obviously, there has been bad years for companies, but they are recovering even more quickly than their "junior colleagues" in the S&P 400 or 600. Have a great and profitable investment.

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