Where there is no counsel, the people fall;
But in the multitude of counselors there is safety. – Proverbs 11:14

Part 1

In the busy and fast-paced lives we lead, we rarely notice how everything around us is constantly improving, updating and changing. From your local grocery store to the S&P 500, prices keep fluctuating everywhere. All these actions seem cluttered, distorted, and too fast to comprehend. However, a relatively simple system runs behind everything. It is the flowing river that connects all the streams: The economic law of Demand and Supply.

Most people generically coin demand as the wish to buy a product. Yet, the real meaning is much deeper. In economics, demand is termed as the willingness and ability to buy something. Once someone fills both these criteria, his wish can be called demand. Supply is similar, and refers to the willingness and ability to sell when. When people who can both demand and supply come together – Volià! – we have a market!

Now, the interaction between the people who demand and the people who supply is what determines the price of nearly everything, from fruits to stocks. This occurs in a relatively simple fashion ; people who supply (let’s call them person A for simplicity) wish to sell their product to people who demand (person B). However, person A and person B now have to come to a reasonable price : too low and person A wouldn’t be willing to supply, too high and person B wouldn’t have to demand. The price both parties agree upon is called the equilibrium price, and is the price the product will sell for till this negotiation happens again.

While my example used two people, the real world generally involves all those wanting to demand and supply in this equation ; this could be as little as two people to as much as the whole world! In stock markets, these negotiations happen continually, and between myriads of people, resulting in continually shifting prices.

Now, these shifting prices can go two ways : up or down. What determines its direction has to do with how many people are there on the supply side and how many on the demand side. Think of it as a scale ; when more people are there to demand than those to supply, the item becomes scarce, pushing its price up. On the contrary, if there are more people to supply, more of the item is available to circulate, pushing its price down.

The general aim of most investors in the stock market is to buy low and sell high. This unwritten law is the backbone to investing, and is the key to profiting from the market. However, this is much easier said than done.

Although I have only mentioned one, there are myriads of other factors that affect stock prices : Company financial condition, public sentiment, future forecast changes and even the climate has a hand in this! Now, although humans cannot weigh all the factors and make a probable prediction on stock prices, investors continue to confuse me by buying stocks no one would have bought otherwise, and proving the whole market wrong as they earn from skeptical stocks that could have soared or crashed.

My goal is to uncover the process behind stock selection, identify the core parameters that are taken into consideration and judge how accurate this method is. And I want to do it all by computing my methods based on Mathematics, Statistics and Economics.

Although at first glance the stock market may appear chaotic and cataclysmic, we now know of the peaceful system that quietly ticks underneath the noise. It governs everything, from our daily lives to our business ventures, and can be a formidable enemy to predict. Adding to it, the other innumerable influences add to the challenge. My goal to make sense of this irrational clutter and to find the answer to the age-old question: What makes a stock truly worth buying?