Here are carefully curated pointers for beginners. These are stock investing tips that I’ve built over time based on my learning and realizations.
Knowledge of these tips and their implementation has made me an improved investor. But more than that, they have widened my view on investments as a whole.
How I use these tips? I’ve made it a point to re-read this article at least once a year. The tips mentioned here touch bases on almost all critical aspects of stock investing. Every time I read this article, it triggers new realizations.
I’ll not shy away from saying that this has been one of my timeless articles that sadly never got the eyeballs it deserves. Hence, I’m re-writing it and posting it as a new post. What do you think about the article? Please tell me in the comments section below.
#1. Remember The Concept
What is the concept of stock investing?
“Buying stocks of good businesses at undervalued price levels, and then holding them for an extended period (long term).“
What is a good business? They are companies with a wide moat. What does it mean by undervalued price? It is that buy price that is below the stock’s intrinsic value. How long is the long term? Holding stocks for periods more than three (3) years will qualify as long-term investing.
#2. Expect Realistic Returns
Buying stocks with hopes of doubling the money in few months will not happen. But it is also true that Multibagger stocks are available in the market. But they also can multiply the capital at a limiting rate.
When the holding period is 3 to 5 years, Indian stocks can give returns of 15% per annum. At this rate, your investment will double every 5 years (rule of 72).
#3. No Alternative For Long Term Holding
Even for expert investors, the short-term price volatility of stocks is like a puzzle. In the short term, stock price movement is almost impossible to predict.
But yes, some people make a living from technical analysis. But an untrained investor should stay away from it. Extensive training is necessary to practice technical analysis.
What is the alternative? The alternative is to practice long-term investment. How to do it? Do not buy stocks in haste, and neither sell your bought stocks in a hurry.
The bigger picture is to hold on to your stocks for a very long term and benefit from the power of compounding.
#4. Practice Makes Perfect
There is no alternative for self-learning. Like we cannot learn to ride a bicycle by reading books, to learn stock investing, we must start buying selling stocks ourselves.
Be prepared for few bad decisions. Learn from it, and keep investing. But while we are learning, we must note the following:
- Media Stock Suggestions: Companies declare their results once in 3 months (quarterly). More detailed results come only once in 12 months (annual). But the news channels have to come up with attention-grabbing contents every hour. How to do it? They do it by trying to find reasons and meanings out of every tiny movement of the market. Remember, such hair-splitting is unnecessary.
- Company Fundamentals: So, if we are not giving importance to media coverage, what we shall do? Focus on building your skill to identify a strong business and estimating its fair value.
Reading and implementing the learnings by actually buying and selling stocks will do the trick.
#5. Buy Its Stocks If You’ll Buy The Whole Company
An investor must first understand a company, build a perspective about it, then buy its stocks.
The thought process should be like this. We have bought shoes from Bata stores since our childhood days. There were no complaints about the quality and reliability of Bata shoes. Being an investor, would you like to buy shares of Bata India? I’ll buy it.
We have experienced the rise and fall of few Indian companies like Satyam Computers, Sahara Group, Kingfisher, Jet Airways, Cafe Cofee Day, DHFL, Essar Steel, Yes Bank, Bhushan Steel, Reliance Communication, Future Retail, etc. Knowing the recent track record of these companies, would you like to buy stocks of these companies? Perhaps not.
That is why experts ask to first understand a company before buying its stocks. This type of stock investing will substantially minimize the possibility of a loss.
#6. Buy When Prices Are Falling, Sell When It Is Rising
It is the most straightforward stock investing tip of all. But unfortunately, we still cannot follow it because of our psychological limitations.
We get scared when prices come tumbling down. Even if the business fundamentals are strong, just because its stock price is falling, we start to sell it. It is a mistake. When prices fall, it is the time to buy more of it – not sell (limitation).
Similarly, if a stock price is rising, we tend to buy that stock without even checking its business fundamentals. Generally speaking, rising stock prices allows us to sell – not buy.
#7. Sell Stocks Of A Sick Company Even If Means Booking Losses
We often hear experts telling us not to trade too frequently. They also advocate long-term stock holding. It must not confuse us into believing that we can hold on to ALL stocks for the long term. It will not work.
For example, suppose you’ve bought a stock at say Rs.1,000 each. After six months of holding, you found the stock price to fall to Rs.600. At this time, you might reason that holding it for the long term may make up for the loss. But at this point, look for the future business prospects of the company. If the current news related to the company is gloomy, sell without further adieu.
#8. Best Managers + No-Moat = Don’t Invest
Firstly, great managers-run companies are scarce. But even so, if the company has no moat, it will eventually perish. There is no point in investing in such companies. A bad Formula-1 team cannot win just only because it has a Schumacher.
Similarly, a wide-moat company run by average managers would be better than a no-moat company run by great managers.
But it is also true that terrible managers can drown even the widest-moat companies. Read next.
#9. Terrible Managers + Wide-Moat = Don’t Invest
During my Job days, I used to travel to the companies of my clients. In my experience, I would say that company run by quality management is a rare thing.
Bad managers are almost like parasites. In most cases, it is these parasites who destroy a company.
As an investor, it is critical to NOT INVEST in a company run by PARASITES. Hence, learning to evaluate the quality of management of a company is the key.
#10. Past Performance + CAPEX + Cash + Return = Future Growth
A company that has done well in the past might not continue to do so in the future. It is true. Why the uncertainty? Because nobody can foresee the future. But we can make a guess. How?
To judge the future, we can look back and see the historical data. But looking only at the past price movement or dividend history will be insufficient.
We must also look at its CAPEX (Capital Expenditure). High CAPEX (in the last 5-Yrs) is a clear indication of fast growth in times to come. Look at the company’s cash flow report to get the CAPEX numbers.
Companies that are spending high on CAPEX tend to become illiquid. We would not like to invest in a cash-starved business. To check this, compare the company’s current asset with its current liability (Current Ratio). We would like to see the ratio always remaining more than one – for a high CAPEX company. For other companies, a current ratio of more than 2 is better.
Further, we would also keep a check on the ‘Return’ attributes of the company. A consistently high return (ROC) – more than its cost of capital is a minimum criterion.
#11. Set The Right Margin Of Safety (MOS)
Every time the market does not offer us the opportunity to invest in good companies. Why? Because such companies almost always trade at overvalued price levels.
In a buoyant market, investment opportunities are scarce. Hence we may decide to invest in less-popular companies. But we must be mindful that it is here we are treading into the risky waters.
But we can follow a rule. We can set a higher margin of safety and then buy such companies. For high-moat companies, even a 10% margin of safety (MOS) will work. But with other companies, we might consider MOS of 35% or more.
#12. Long-Term Holding Does Not Mean Buy-it And Forget-it.
People who invest in stocks successfully often advocate the necessity of patience as a psychological trait. The most logical action of a patient investor is to hold on to their shares for the longer term.
But patience and long-term holding do not mean buying stocks and then forgetting about them. It also does not mean to track only their price and forget about the evolving underlying fundamentals of its business.
Tracking must be done deeply.
At least once a year, evaluating the intrinsic value of the stocks is a good idea. A fall in the value of a company is a bad sign. Try to know more about what is causing the slippage. What is wrong with the company? If no major negatives are there in the news, stick to your holdings.
#13. An Eye For Free Cash Flow
People often give too much importance to sales, net profit, EPS, net worth. But there is something more than all of these together. What is it? The ability of the company to yield positive free cash flows (FCF) in times to come.
The ability of the company to generate future free cash flows builds its intrinsic value. A company generating negative free cash flows will have a zero fair value. Even if the stocks of such a company are trading at Rs.1 levels, they are still overvalued (expensive).
#14. Be Sensitive To Market Peaks and Bottoms
Both peaks and bottoms have their advantages. Peaks are the time to book profits (sell), and bottom is the time to buy quality stocks.
How to know if the market has peaked? Search for the previous peaks, and look further into the past, 5 to 10-Yrs. Now check the current Index level and compare it with the past.
Similarly, if the Index has corrected by more than 20-25%, it is heading for its bottom.
15. Do The Opposite of What The Market Is Doing
This style of investing is better known as contrarian investing. It is an investment strategy using which investors take buy-sell decisions that contrasts what the majority are doing in the market. What is the logic?
When the majority are buying stocks, it takes the price to its peaks. If we buy stocks at this point, there are more chances of catching an overvalued stock. It is a time that is more suitable for selling the current holdings.
Similarly, when the majority are selling, it brings the prices tumbling down. If we buy at this point, there are more chances of catching stocks at the undervalued price levels. It is the time that is NOT suitable for selling the holdings.
A combination of value investing and a contrarian approach can make stock investing almost fool-proof. Being aware of a stock’s intrinsic worth is the first step. Then buying it when the market has crashed makes the investing style risk-free.
These 15 stock investing tips are collected using the experience of expert investors like Warren Buffett.
Though I’ve touched upon these fifteen points only briefly in this article, you can also find more detailed write-ups. Just follow the given links, and it will land you on the desired page.
I follow these stock tips. Over time, the list has grown. But as the number reached fifteen, it seems to cover almost all aspects of stock investing that retail investors must know and practice.
In case something new comes up, I’ll certainly add it to the list. If you have any suggestions, please leave them in the comment section below.
Thank you for reading, and have a happy investing.