Everyone wants to make money in stocks, irrespective of the level of experience. It is easy to fall for the temptation and lose money in the Stock Market. One must have a good strategy along with the strong discipline to have good returns. I was also losing money when i started but now i am earning around 120% per annum after i started value based investment.
Value-based investing Strategy
Investment guru Warren Buffett (One of the World’s richest person) believes in fundamental investment. He has long held the belief that people should only buy stocks in companies that exhibit solid fundamentals, strong earnings power, and the potential for continued growth.
Three golden rules for fundamental analysis:
- Buy stocks as if you want to hold them forever.
- Focus on quality stocks.
- Buy only undervalued stocks.
1. Buy stocks as if you want to hold them forever
We should buy stocks as if you are buying partnership in the whole company. It will help you in getting excellent long term returns. Think about the future growth prospects of the business. Here are a few points to consider:
- Good brand recognition: Look for companies like Apple with great brand value.
- Products are useful and unique: Companies with pricing power, strategic assets, powerful brands, or other competitive advantages have the ability to outperform in good and challenging times. A long term investing strategy requires investing in companies that can weather both good and bad economic times.
Companies like IRCTC have no competitors. InfoEdge(Naukri.com, 99acres, Jeevansathi) have advantage of strong userbase over its competitors.
- Talented workforce: Check company rating on Glassdoor to know more about company culture, business ethics, and management.
I personally prefer Affle, TCS, Infosys over other Indian IT companies due to business ethics and Employee ratings.
- Dependency: Check company’s dependency on Govt policies, US market, international oil prices, etc before purchasing. You may use websites like https://tijorifinance.com/ to check product wise and location wise breakup of stocks.
2. Focus on quality stocks
You can apply all these filters on TickerTape to shortlist reputed stocks with strong financials:
- Net Sales: It’s better to invest in companies whose sales are above 5000 Crore.
- Current Ratio: It is one of the important indicators of strong “financial health”. It’s defined by Current ratio = Current asset/ Current liabilities and is measure of company liquidity.
It’s better to have [Current ratio > 1.5]
- Debt Equity Ratio: Ignore companies whose debt is greater than the net current assets as they have higher chances of bankruptcy.
It’s better to have [Debt Equity Ratio < 1]
- 5Y Hist Rev Growth: It’s the main criterion to check company growth. Revenue growth should be greater than 8% for average of 5 years.
[5Y Historical Rev Growth: > 8%]
- P/E ratio: We need to find those good stocks which are not in demand right now. P/E ratio means, how much an investor is paying for a share price (P) compared to its net profit (EPS). Low P/E ratio means opportunity for future growth.
[P/E ratio < 20]
- Dividend friendly: If you are looking for long term investment, then dividend matters. Look for the following points:
-In all 5 years, the dividend has been paid or not.
-In all 5 years, the dividend pay-out ratio has been uniform or not.
3. Buy only undervalued stocks:
The market value of stocks says virtually nothing about the stock. Actual value of stock can be determined using intrinsic value. Calculating intrinsic value is difficult as it needs various financial skills. For now, you can use websites like http://www.attainix.com/ to check it.
We should purchase stock only if [current price < intrinsic value]
Some more tips:
- Invest in What You Understand: Buffet only invests in companies he understands and believes have stable or predictable products for the next 10 – 15 years. This is why he has typically avoided technology companies.
- Check SWOT analysis on Money Control https://www.moneycontrol.com/india/stockpricequote/computers-software/infosys/IT before purchasing.
- Know more about CEO: Growth of the company depends on its leader. Know more about the thought process of CEO by searching him on Wikipedia and Youtube. If his values align with you, go ahead.
- Check the social corporate responsibility of the company. It gives some ideas about the ethics and vision of the company. If they care for society, chances are that they will care for shareholders too.
- Don’t sell any stock in loss: You can’t have loss if you don’t sell any stock in loss 🙂
If you have done your homework and invested only in quality stocks, then you don’t need to panic. Never sell the stocks even if they are showing bearish behaviour. Just have patience and wait for them to recover.
- Keep Cash in Hand: Investment opportunities become available through broad market corrections, recessions, market crash or individual stocks that become bargains. These are not predictable events; so cash on hand is an important concept in value investing.
- Compounding and Patience: Buffet believes in long term value investing because he understands the power of exponential growth. Companies with sustainable profits can pay and grow their dividends. There are few more powerful long term investing strategies than dividend growth compounding.
Stock market is not as difficult as it seems. Once you have mastered the fundamental concepts, it’s a money making machine. If you haven’t started yet, You can create account quickly online using zerodha. Also, Do let us know in comments about your favourite strategies of investment in stock market. Thanks for reading.