We asked about stock selection strategies to our closed group of investors.
78 % of the people buy a stock because a random uncle recommended it on a morning walk or at a Diwali party.
About 62 % of them confess on parking a substantial amount of their portfolio in one stock. Why? Because it is owned by a family of big businessmen.
Most of them cringed about investing in a stock without having knowledge about the company. Some didn’t even know what products or services the company provided.
Haven’t we all done this at least once during our investment journey? Investing without defined financial goal or stock selection strategies ? Yes we have! Sometimes, succumbed to stock market losses as well.
Most of us are not from finance background. Sadly, neither is money and investments taught in school. So, when exposed to a fat paycheck after education, young adults fail to manage money. Leave alone think about investments until their late 20s.
But thanks to the Cinema and OTT of the modern world, investment in stock markets is trending. Everybody wants to be a big bull!
Prevent yourself from burning your fingers by investing without understanding in the share market. Gather some useful and tested stock selection strategies.
I have always believed, selection of personal investments is more of common sense more than math.
How do I strongly say that? I believe –
- A good observation of the companies around you,
- Understanding the products they offer and
- Following up financial news.
These aid a good hand in compiling a return-generating portfolio of investment products.
Before we start with the strategies, let us recall some basics advices of Warren Buffet and his stock selection strategies.
1. Diversification –
With his years of experience Warren emphasizes in his book to not keep all eggs in one basket!
Which means that diversification of funds in a portfolio to minimize risk is non-negotiable. Do not park all your funds in just one scrip because of its past records. A sudden dip in its movement will hit your capital.
2. Safeguard Capital –
Always remember to protect your capital. One of the conservative stocks investment strategies. If you safeguard your capital, you can always build on it, gain appreciations and dividends.
3. Don’t be greedy –
While investing all your capital in a gladiator stock might give you wonderful returns for short, but hold on. The greed may pull you down with a bear’s jump on the market. Be ambitious but do not be greedy in the market!
To understand the money mindset better and improve money management, click here.
Let us now talk about the core of this blog.
Top 5 insanely good stock selection strategies –
These strategies are easy to understand and practical. They have to be learnt by beginners and practiced by all investors.
1. General Observation and Analysis as a strategy –
This strategy is purely based on my experience. I love going to the super market not just to buy groceries, but to keenly observe fast moving products. I then check which companies these products belong do and do my little research about their performance.
The other day I noticed how quickly Nestle’s Baby cereal box was getting picked at D Mart. I also analyzed that the number of births in 2020-21 were higher since COVID was declared a pandemic.
Assuming that a baby would need Nestle’s baby products for the next 3-4 years, I decided to invest in 1 share of Nestle. This was around end of April.
Also, since D Mart stores were expanding across the country, and customer loyalty of D Mart is stronger due to its attractive discounts, I bought 1 share of Avenue Super Markets(owner of D Mart) assuming a good growth over following years along with some basic study.
Another example of such an observation occurred to me when I realized that from the time lockdown was announced, the need for comfy clothes and slippers was obvious. The go to brand in India for comfortable pajamas is Jockey (owned by Page industries) and for regular sandals is Paragon.
Similarly, during summer season, most of my neighboring houses and buildings were getting a renovation and painting work done. I saw buckets of Asian Paint buckets piled up. Check its fundamentals and concluded that it is one of the best in paint industry. So, I decided to buy just 1 share to observe further.
I then decided to buy these shares too as the work from home scenario never seemed to end in the foreseeable future.
My aim is to hold the shares for long term and I define long term as at least 3-5 years. You can see the appreciation in the stocks purchased. Use similar observations from daily life to begin with stock selection strategies.
2. Financial News as a strategy-
This is a key stock selection strategy. Keep an active look on financial news. Just scroll through headlines and get a hang of company names and their announcements. If something major catches your eye, have an in-depth look at the news and the performance of the company.
The financial news will cover about expansion/acquisition/ dividend/ buyback/ FII Investments announcement. A subtle news about management misbehavior/ change/resignation also affects movement of share price. An intervention of government action might sometimes dampen the spirits of investors which will lead to plunge in the market price of the share.
These fluctuations sprout opportunities of investment. Hence look out for such chances to score blue chip shares at dips.
You can study the fundamentals of the company too, which we will talk about in the later part of the article.
3. Stalking Mutual Funds as a strategy –
If you are a beginner, please know that Mutual Funds are a pool of money invested by people like you and me. Mutual Fund managers manage the investment pool with in depth research and analysis. They possess the intellect and training to select stocks/ other investment instruments and park the funds in calculated manner.
Each Mutual Fund document will contain the details of all the stocks invested in. Most mutual fund managers invest in large and mid cap companies. Stalk these mutual funds to easily pick the well-studied scrips and invest as per your risk apatite. Take cues from these mutual funds and make a list of your best suited list of shares for your portfolio.
Click here to get a list of best performing Mutual Funds
Click here to see a list of Mutual Fund managers favorite scrips.
4. Company Analysis as a strategy –
a. Debt-Equity ratio –
This ratio should be as low as possible. It implies the total borrowings of the company at a point of time in comparison to the shareholder’s equity. If a company is into too much debt, the company will be unable to focus on making profits in the long run. Unsustainable debt will lead to panic in the operations of the company and the profitability of the company will hugely suffer.
Hence zero or almost zero debt equity ratio is considered better.
b. Management evaluation –
Imagine investing in a company where the management is constantly involved in feuds. Or imagine the management involved in frauds outside the company. Would you feel secure about your investment ? No!
Hence a simple google check about the company’s management, frauds if any, particularly about their key managerial personnel will do the job.
c. Growing profits –
A good company is one where the profits each year keep increasing. There can be losses, but evaluate if it is an abnormal loss. Check the company’s website for the reasons, their minutes of meetings or the news.
Increase in profits of the company has a direct effect in the market price of the share. Therefore, higher the profits, better for the investor. These dividends may even be distributed to shareholders in the form of dividends.
A few high dividend paying companies – Click here.
d. Competitive analysis –
A long term player will be one who constantly improvises his products and provides an edge over similar line of produce of his competitors. Always bet your money on the one who has that competitive quality over the other players in his industry.
The X factor may be in the form of monopoly, emotional equity of the brand, differentiation in product or substantial market share.
Comparison charts of peers of the same industry are available on Screener.
5. Be Specific –
Be specific about the stock you pick. Pick stocks from specific industry or specific segment or just be company specific.
Due to the pandemic, the travel and hospitality industry went crashing down. Investors withdrew their money from such shares. The assumption was that these companies might not perform well during the lockdown situations. It would be difficult for any investor to make short term profits from this segment.
However, right after the successful vaccination drives, the demand for tour and travel rose like never before and the market demand for such shares shot up.
Check price movement of Indian Hotels (Taj Group) in this chart. Similar was the case for a company called EaseMyTrip.
With these strategies to begin with and to adhere in your investing journey, I wish that your financial and investment journey is not a rollercoaster.
Technical analysis and studying the fundamentals of a company are surely the most sought after strategies demanding expertise but my aim for this blog is to reflect to the readers that most of money management and investment game is actually common sense.
What is your opinion on the same? Leave a comment.
Want to begin with candlesticks in the most simple way? Read this article. Click here.
This article is for educational purposes only. Any views mentioned in the article are not stock market advices.