First of all, why to invest in stocks? Why not avoid stock investing?
We know that stock investing is risky. Even for people with age, stocks often lead to losses.
There is always a buzz about stock market all around us.
But when we reach out to find an experienced and successful stock investors, we see them only on news papers and TV.
There is nobody around.
Parents are successful stock investors? No. Friends know stock investing? No.
There are Gurus around who teach and preach stock investing? No.
So why at all beginners should risk their money in stock investing?
The doubt is very relevant and meaningful.
We cannot proceed ahead with this blog post without answering this doubt.
Why we invest money?
For returns? No. We must invest for wealth generation. “Returns” will come next.
How to effectively generate wealth? By wise investing.
What is wise investing?
Putting money in those investment options that we can “understand” and that also complement our “psychology”.
Understanding investment options means, being aware of its risks and rewards.
More importantly, how to minimise the risk and enhance rewards.
Psychology is more about our inner self. You like fast cars (high risk)?
Like hard rock music (aggression)? Do we like playing golf (slow and steady)?
Our inner attributes also decides which investment options matches our inherent self.
Knowledge (deep understanding) of a person also plays a important role in investing.
Investing within the limits of ones knowledge is key.
This is called investing within ones “circle of competence“.
People mostly fair bad in investing because they have narrow knowledge.
But instead of being aware of this limitation, they experiment too much (outside their circle of competence).
It is a general rule, first you read the BOOK and then go into the LAB for experiment.
The deeper is ones knowledge of the investing options, more assured and faster will be the wealth generation.
So we invest money for wealth generation.
And, if we are wisely investing, wealth generation will happen faster.
To trigger the activity of fast wealth generation, “investment returns” plays a key role.
So idea is to select the high-return investment options, BUT within our “circle of competence”.
Stocks can give the best investment returns. Better than mutual funds, golds, bonds, deposits, anything.
But practicing stock investing (experimenting) without gathering knowledge makes it very risky.
People do not understand stocks but buy it with a HOPE of making money. Stock investing is not gambling.
People who make money in stocks have knowledge about stock investing.
Stocks lies within their circle of competence.
Why stock investing attracts people?
If stock investing requires deep knowledge, why it still attracts people towards it?
The answer lies in their potential “returns”.
Let me give you some real numbers just to explain what stock really offer as investment returns.
List of famous stocks given more than 40% per annum returns in last 10 years:
- Ajanta Pharma – 58% p.a.
- Eicher Motors – 52% p.a.
- Bajaj Finance – 49% p.a.
- Page Industries – 46% p.a.
These numbers looks awesome, right? But only on hindsight.
10 Years back, who thought that Ajanta Pharma will top this list. Who knew Ajanta Pharma.
10 years back only few people were buying Eicher Motor’s Enfield Bullet.
But today this product is a craze.
Back then, nobody could say that Royal Enfield will be selling like raze in India.
So, the point is, without deep knowledge about the subject (economy, business, stock analysis etc), it would have been impossible for people to identify Ajanta Pharma, Eicher Motors as Multi-Baggers 10 years back.
Stock investing is great because it has potential to generate best investment returns.
But the control point is ones understanding of stocks.
Develop a deeper understanding of stock investing and you can also make returns as stated above.
There are no shortcuts, so don’t ask me that.
Which stocks to pick for investing?
This question itself needs correction. Why?
When we are venturing into stock market, of course we are there to buy stocks.
But the phrase “picking stocks” is slightly misleading for the beginners.
It will be much better to phrase our question alternatively.
Just by rephrasing our question, you will notice that how much it will enhance our vision
We were looking for answer of an important question, which stocks to pick?
But lets try to ask the same question differently…
Which companies stock to pick for investing?
As soon as we start to look at stocks from the filter of its underlying business, our vision broadens.
Stocks of companies which is doing good business are better for investing.
But how a beginner can identify a good business?
It is not so difficult…
Look around yourself and try to list down name of products that you like to consume.
Good products are often result of good business. Only good companies, doing good business, can sell good products.
Isn’t it logical to pick stocks of companies selling awesome products in the market?
Few example of awesome products made by Indian companies are as below:
- Royal Enfield – By Eicher Motors
- Real Juice, Chawanprash, Odomos, Hajmola, Meswak etc – By Dabur
- Taj Group of Hotels – By Indian Hotels Co Ltd.
- Suzuki S Cross, Ciaz, Ignis, Balleno, Brezza – By Maruti Suzuki
- Cornetto, Kwality Walls, Dove, Knor, Ponds, Lux, Vaseline, Surf etc – by Hindustan Unilever
- XUV 500 SUV – by Mahindra and Mahindra
- Airtel – by Bharti Airtel
- Tractor Emulsion, Royal – By Asian Paints
- Washing Machine – By Bosch India
- Indigo Airlines – By Interglobe Aviation
- Car Tyres – By MRF
- Trucks – By Ashok Leyland
- Nexon SUV – by Tata Motors
- TV Channel for entertainment – By Zee Entertainment, Sun TV
- Nescafe, Maggie, Kit Kat , Boost, Haagen Dazs – By Nestle
- Good night, HIT, Cinthol – By Godrej Consumer
- Good Day, 50-50, Nutri Choice, Bread, Cheese etc – By Britannia Industries
- Saffola, Parachute, Livon, Nihar etc – By Marico
- Fevicol, Fixit, M-Seal – By Pidilite Industires
- Watch, Jewellery, Eye wear – By Titan
This list can be endless.
The more you will observe, more such beautiful products backed by wonderful companies will emerge.
Stocks of such companies, whose products are known, and with whom we can relate in day to day lives, can be a good starting point for a beginner.
What to check in stocks of these companies?
Yes this is important.
I generally use my stock analysis worksheet to check the “business fundamentals” of these companies.
Why it is essential to check the business fundamentals?
No matter how good is the company, if its stock is not bought at right price, it will eventually make a loss for its investor.
So, companies fundamentals are checked.
Then this result is compared with the market price of its stock to conclude if the bargain is good or not.
Lets understand it like this, suppose you need to buy a Tomato Ketchup (by Nestle India).
Generally a 500gm bottle of Ketchup will cost you Rs.100/-.
But suppose for some reasons (Tomatoes shortfall in India), the price of Tomato Ketchup shoots to Rs.1,500 per 500gm bottle. Will you still buy it?
Certainly not. You will switch to Pickles.
What does it mean?
It means, everything has its own fair price. Beyond a limit, prices become overvalued.
We never buy overvalued things, right?
The same concept stands true for stock investing as well.
It is essential to check what is the fair price of a stock.
In the world of stock investing, fair price is known by a jargon called intrinsic value.
Though I am no expert to calculate intrinsic value of companies, but my stock analysis worksheet works reasonable well for me.
At least it gives a hint that price is treading on which side (overvalued or undervalued).
But if you do not want to go into those details of stock analysis, you can just check these:
- Sales Growth,
- EPS growth,
- ROE and
- PEG ratio.
Financial ratios are very essential part of any stock analysis.
I have already written a detailed blog post on this topic. You can read about it here.
To know more about undervalued stock, you can also read this blog post.
Before venturing into the world of stock investing, developing the basic know of how to correlate market price of stocks with its business fundamentals is important.
The more knowledge one has about the economy, business, stock analysis, wider will be his/her circle of competence.
Wider circle of competence mean, one can take more calculated risk.
There is no doubt that stock investing gives maximum returns.
But this blog post has been written to re-emphasise this fact, and also to highlight what a beginner can do to earn high returns from stocks.
There will always be stocks available which has potential to become multi-bagger in times to come. So its never late.
Just build your skill of stock analysis and start investing.
Identifying such companies becomes easy when we backtrack them by looking at their popular products.
It is also essential to keep a control on the price in which one buy their stocks.
The market price of stocks must be trading at undervalued price levels.