Difficult as this economic climate appears, I want to stress that this is still a very good time to invest. The third quarter saw a correction morph into a bear market and panic. Steep stock market deterioration was concentrated in late September and October. Extreme volatility is reminiscent of typical bear market bottoming, forming the classic V-shaped market. Many stocks today are at their 52-week lows, many below listing or IPO price, valuations higher than the market price!

But there’s an important hitch - we need to be much more careful in our stock selections. As long as we remain prudent investors, you and I stand to see massive gains in the weeks and months ahead. This is one of best profit opportunities of our lifetime.

Everything today looks good for a buy but does that mean we buy anything? I have listed below four simple fundamentals that you need to look at when buying in these volatile markets.

The Best Measure: Return on Equity (ROE)

The foremost thing you need to do is zero in on a company with high ROE. This is a benchmark to find the efficiency of the company. This measure will actually tell you how much profit a company is making on the equity it has. ROE is a report card for a company’s management. We can’t always know what management is up to, but by analyzing a company’s ROE, it lets us know how prudent they’ve been with their shareholders’ money. Management should never forget exactly who it is they’re working for. An ROE number above 15% is good, and anything above 25% is outstanding.

Avoid Companies that Spend More than They Earn

Next to look for are companies with strong cash flows. Examine a company’s cash flow because it’s something that’s hard to manipulate. The simplest definition of cash flow is earnings plus depreciation. What cash flow tells us is how much cash is coming into the company from its business compared with the amount of cash going to fund its operations. The problem is that some companies generate a lot of cash, but they require even more to keep things going. Whenever we see that, we should know it’s not a good sign. By looking at cash flow, we can cut through the thorns and see how healthy a company really is.

Companies with Big Profit Margins

The third step is to find stocks with expanding operating margins. This is very important because it shows us a company that can grow its earnings faster than its sales. When a company has growing operating margins, it usually means the company has pricing power in its market. That’s crucial in this economic environment. More often than not, such a company can grow its profit margins because it has a dominant niche in its market.

Outperforming Other Stocks

The final step in spotting winning stocks is to find companies that are having their earnings estimates revised higher. Beating earnings expectations is great, but we also want to hear a company say that future earnings are going to be better than expected. Spotting earnings revisions is a great way to uncover value stocks before the crowd does.

I hope my readers would now look into these four fundamentals discussed above before buying or selling stocks.

Kirtan Shah, a Certified Financial Planner, is a partner at AmbestinQ Consultancy Services.

On vacation earlier this month my wife and I visited a casino during an evening with friends. We were clearly the poorest of our group. We started setting a limit to the amount we would lose that evening. Like all our friends, we lost. The difference in amounts lost was just a matter of decimals.

The losses showed us who paid for plush setting of the casino, good liquor and food, served “free.”

The capital markets are in some ways akin to a casino. Large advertisements by merchant bankers, stockbrokers and mutual funds are paid for - by the person in your mirror.

I have written earlier about methods of analysis. At the risk of repeating them, then: they are fundamental, technical, and logical. Call them the three guides to making money.

Three ways of losing money would be:

1. Gambling on horses, cards or at the casino - the fastest

2. Women - the most pleasant

3. Speculating on the stock market - the most certain and definitely the most boring

Add to these, a fourth - watching too much TV or reading too many expert opinions, mine included. Rewind to the beginning of the last boom and early April 2003 when the jokers on TV suggested a drop to 2,200 for the Sensex from 2,800. Less than a fortnight later, this same bunch was speaking of the Sensex going up to 6,000. There had been no fundamental change during those two weeks.

Fast forward to January 2008: 25,000 was almost the overnight target, 40,000 in the rather near future, for the Sensex (which was then at 21,000). During a meeting with a brilliant fund manager recently, he showed me a clip from a TV channel. It had a number of the most respected names in the capital markets providing sound bites on the Sensex crossing 20,000. Everyone was advocating a buying spree. There was to be no end to the boom.

Now the same purveyors of garbage suggest 6,000 and lower. The difference is that we have a fundamental change in lower earning forecasts, which was obvious even before Diwali 2007 when the index was around 20,000. Will the experts be correct in their bearish forecast? Unlikely for an extended period, would be my guess.

Yes, they will be for a few days, or weeks. Fear and the memory of recent losses will ensure the investor will refrain from committing fresh money to the markets. But the smart money that exited the markets in January, close to their peak PE of 30 on the Sensex will nibble at choice stocks on offer, now at a market PE of about 10. Along the way will be opportunities to grab at the feast table - opportunities such as a payment crisis, the failure of a large institution, announcement of elections or formation of a Government, when shrill loudmouths, only distinguishable by their shrillness, from Mayavathi, Jayalalitha, Mamta Banerjee, Yechury, and the Karats confirm their idiocy on TV. Each occasion such as the ones mentioned above that causes a temporarily sinking Sensex, the smart money will refill its pockets with the crème de la crème of the equity markets.

Start loosening your purse strings in bits and build a quality portfolio. Take a couple of years doing that, for the opportunity cost of money in a stagnant market would mean an erosion of 50% of your money’s risk-adjusted value in 3 or 4 years. At 10%, the current bank FD rates, your money doubles in about 7 years. Expecting double that rate of return on equity investments is fair considering the market risk, thus leading to my above assumption. However, the markets might just surprise and double next year or stay flat till 2015. I am not gambling on the time frame!

Getting into an SIP in mutual funds, or directly in a personal portfolio is a good idea now. This will likely be a good sum in 10 years, if not sooner.

Meanwhile, if you decide to visit that casino carry just as much cash as you believe you’d pay for a nice evening. You will also find that it’s a lot more fun losing it yourself, than on the advise of an expert.

Naveen Fernandes is Vice President - Sales at Orbis Financial Corporation Ltd., a SEBI approved custodian. He is a Certified Financial Planner. On good days, he fancies himself an investment expert.