May 19, 2015
Investing in stock markets is quick money for some; while an asset of growth and wealth creator for others. All this depends upon the motive of investments, as there are different modes adopted for the same by every individual. However, it is an established fact that long term investment is what actually reaps benefits in the long run. Again depending on the risk taking capacity of the investor, there are two ways to select from. Either rely on a low cost mutual fund, which diversifies risk across sectors, or take the individual stock picking route which is riskier but can do wonders if done in the right way. The former shall give one a reasonable return and the latter if done in a systematic way will generate wealth.
Work on the principle; buy what you can analyze and also understand the business of the company that you intend to invest in. When you invest in a company you actually become a part owner of it. Keeping aside the short term fluctuations invest in a healthy business that has scalability ingredients.
The first step would be to look into an industry that you are familiar with. The industry chosen must be in tandem with the long term growth prospects of the economy. This will help you in safe guarding your investments to a great extent even if there is a slight slowdown in growth prospects of the economy. So once the industry prospects are measured on the growth scales of the economy, primary screening of investments is done. This process has to be followed by enlisting the companies that are engaged in the short listed industry.
Right management is a must to see any business grow so that we can see good growth prospects. A sound management will always take steps to grow the company; which in-turn benefits the investors. They can actually make or break the company. Right instincts and intentions must be one of the major factors when analysing the managements’. Thus, management quality is the key when analysing or picking any stock for long term investment.
Next is to pick the best from all look-alikes in the industry. Academically we all know that PE ratio, valuations, financial health of the company, debt structure, dividend structure, revenue model, profitability are all the parameters to be seen before investing in a company. Still there are losses made by who follow these parameters. Reason for that is unsynchronized approach. For example; PE ratio needs to be seen to search the stocks that look relatively cheap, but remember that a rapidly growing company will be more expensive than an established firm with consistent growth. That is where a peer comparison in the industry will play a key role rather than sticking to the rule of investing in the stock that has lower PE. Seeing the other side to it, stocks could be cheap also because the business is growing less or reducing; or could be expensive because of earnings visibility going forward. This is where valuations with future earnings need to be seen in sync. One has to be forward looking in the financial analysis as past is only an indication and it helps as a tool or guidance for doing future study.
Financial health of the company can be well seen through the annual reports published by the company. Read between the lines for the consistency of profits and growth. A sound financial analyst will have the capability to bring out the loopholes fabricated in the reportings. One has to always keep in mind that Top line is Vanity, Bottom line is Sanity and Cash is Reality while analysing any company. Further, debt is a factor that obviously indicates what is left after draining out the owed money. The cost and composition of debt has to be studied carefully. The cash generation ability of a company will indicate the debt repaying capacity of that company. We must also keep in mind that the company must not borrow short-term debt for creating long term assets. Dividend paying capacity again indicates the psyche of the management running the company that you are betting on. An investor friendly company gets better discounting on the bourses.
Considering all of the above parameters one can narrow down to a stock which is not 100% full proof but atleast has the comfort zone of not having shocks in investments. A well made blend of all these aspects definitely will help in identifying gems for tomorrow.
Alongwith considering what to do, hands-on what not to do is equally important. The first and foremost is avoid herd mentality. Never chase a stock which is already a talk of the town. Lastly never marry a stock, keep your exit doors ready. A mental working of profits expected should always be set with a heart to even see ups and downs in the stock movements. Conviction in the research done should be strong enough to sustain the uptrend and down moves of the stock market. In addition to this, one must never feel bad if one finds out that the choice was wrong and cutting the loss if any must be the prime motto in the investment that has gone wrong.
Lastly following the stalwart investor, Warren Buffett and emphasizing on his principles like, the most important quality for an investor is temperament, not intellect. A successful investor doesn’t focus on being with or against the crowd. Whenever he makes an investment, he has no doubt at all that he’s right. And always remember, you don’t have to be a genius to invest well, but, master the basics.