Here is your primer to begin investing:
The devil is in the details and financial statements are the beginning of those details. If you can't read them then you are a loss compared to those who can. Why? Well because financial wizards are always at play. If you don't know what tricks to look for than you will get fooled (insert Greater Fool Theory quote here).
Alright, now you've done the legwork. You understand the quantitative and qualitative aspects of the business. But what about the valuations? Where is the company heading? How do you know they will meet those metrics? What will happen to the stock value if they miss those metrics? SO many questions yet so little time.
Now there are three ways to value a business: discounted cash flows, sum-of-parts or comparables.
Comparables are the most popular amongst investors and bankers. Why? Because are people lazy and don't want to think. Anybody can pull up competitor valuation metrics and apply them to their own model or business. Sometimes it works. But mostly very similar business models. However, like snowflakes, no two businesses are alike. And this is how mispricing begins in the marketplace.
Sum-of-parts is harder but more accurate in terms of asset value. You can add up certain divisions to understand where a companies value drivers come from. For example, Division A may be a low margin service business. Division B might be a high tech manufacturing business. Combined they are worth more. But separately manufacturing may be worth more than services.
The problem is both businesses may rely on each other and exist without each other. This makes valuing independent assets tough. Besides that there are two more problems with sum-of-parts. First independent assets don't have much liquidity. It's unlikely a unique manufacturing plant or distribution facility is worth an equal amount to someone else. In fact, it is probably worth much less.
The second problem is intangible assets. More on this in the next section but right now let's cover the environment. Digital assets are becoming more valuable than tangible ones. This may include assets such as software, brand value or intellectual property. They can create a competitive advantage when in the right hands. But the problem is they are tough to value. Plus the perceived value is different for everybody.