Ask one question before investing - When will I require this money? If answer is near time future. Avoid investing in individual stocks. Invest only if your time horizon is 5, 10, 20, 30 years to develop wealth.
Give your good stories time to grow.
Investing is personal thing and not the community thing. You should be convinced on the story.
Research is not sitting for hours in library and doing complicated calculation on the subject. Instead research is working on the field that excite you. It is not necessary to be expert in all the companies. You should be expert in just few companies say 6 - 8 stocks and know well other companies.
Uncertainties, War, etc can take markets down. No one can predict the markets. You have to understand the market goes down. Once every 2 years market falls 10% and once in 6 years it falls 25%. So everytime markets go down, it is an opportunity to buy 6 - 8 stocks you have researched on.
Putting stocks into categories is the first step in developing on stories. We cannot have the blanket rule saying if stock increase 100% I will sell the stocks. Every stock behaves differently and we should act based on their category.
For eg: You made 50% profit in two companies. First company is fast growing company while other one is slow growing company. 50% for slow growing company is the fantastic return and chances are its a time to sell it. While for a fast growing company, 50% is like a start and have still scope to earn more.
There are five categories -
Fast Growers (Rapid Increasing Revenue in Rapid growing industry),
Slow Growers (Slow growing company)
Cyclicals (That behaves as per the movement in market
Assets Based (Company which is in market since ages - 50 - 100 years and brand value is not reflected in balance sheet. Name of the company itself has huge value. However it is not possible to have the correct value to be reflected in the balance sheet
Turn around
Categories are guidelines and not strict rules, so some companies don't fit into categories, while other can have more than one category. Most companies change categories at some point throughout their lifetime.
Use the categories as guidelines to develop and understand the story but don’t restrict yourself to ask questions while researching
Smaller companies have more potential to grow as compared to bigger companies. Though smaller companies have larger potential to grow at rapid rate but you should not dismiss larger companies. Excellent opportunities do exists in larger stories too.
Rapid Revenue and Earning Growth is the hallmark for fast growing companies
Fast growing companies only attracts the media. But there is nothing wrong in small companies. Choose the companies having growth potential. There is nothing wrong in slow growing companies provided you invest at the right price
Look for signs when you are researching the company's: Steady Earning Growth, Rising Dividends, room of expansion, good cash flows, low debt, strong management, company doing well, story is solid, addition of new products, expansion in different cities are the few parameters to look at.
Just don’t buy stock in hope. Wait for the reality and don’t jump on assumptions. Wait for the correct price to invest and have patience to hold.
Price of the stock will always follow the direction of earnings.
Just because company has done excellent in past and have been rewarding investors with dividends, it doesn't mean it will do great in future too. You need to have reasons of why it will do good in future too. New products in pipeline, expansion in different areas, research and development are few of the reasons that can help companies to maintain profits
P/E Ratio: Company selling $100 a share and earning $10 is Price Earning of 10. It is basically number of years your stock will take to earn your initial investment. Why look at PE: It tells you how much you are paying for a stock. Higher the P/E - it is expensive relative to company’s future earning. Lower the P/E - it is probably cheaper. Fairly valued stock is the one which is equivalent to the future growth earnings of the company.
Compare Stock P/E with it's own historical P/E, with it's peers and industry P/e. All things being equal, company having lower P/E and higher growth rate will be a good start for further study.
Dividend - Part of profit paid by the company to the shareholders. Stock Yield = Annual Dividend Payout / Current Price. Stock Yield in other words is return to your investment. Fast growers usually don’t pay dividend. They invest back all profits in business whereas slow growers pay huge dividends to reward and attract the shareholders.
Not always high dividend yield stocks will always be a good stock. You need to analyse, if company pays all of it’s profit in Dividend, it will surely have higher dividend yield. But will the company has strength to overcome the hard times without compromising the standards set by them of high dividend payments? From where the company will arrange cash when it is facing tough times? Make sure that your company can survive all times including of the time of set backs. The higher % of profits is paid in dividend - review further company’s ability of continuing the same in future too.
Difference between what the company owns (assets) and what is owes (liability) is Equity (also called as Networth).
Company should have enough cash to pay of its short term debt to be called a decent balance sheet. No debt and lots of cash is surely great balance sheet. Do further check if it is earning growth constantly growing or will the cash go off in near future due to lack of earnings?
Total Debt is more than half of the networth value of the stock - Beware and avoid the stock.
Debt in financial institutions, banks and insurance is usually higher.
Profit & Loss Statement: Over the time, all the money received by selling the goods and services is add add up and from that all the expenses that are incurred for selling those goods and services are deducted which results in net income / earnings / profit. Company whose sales is increasing and is reducing its cost - a company has growth potential.
To measure the cost effectiveness - check cost reduction and how it is changing relative to revenue: Profit Margin = Earning Before Tax / Net Revenue. Higher the profit margin, more the company has potential. Compare the profit margin with it’s historical data and with peers in the industry. Continuous growth shows a good potential to become a good story
Stock Picking is risk reward thing. You need to understand how much you will lose if your story goes wrong and how much you will earn if your story clicked.
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