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Best Investment Advice - Stock Investing

HomeBest Investment Advice – Stock Investing

The story goes somewhat like this:

Warren Buffett was once asked about the best investment advice he would give to a money manager just starting out.

He said, “I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities.”

Moderator Adam Smith protested, “But there are 27,000 public companies.”

“Well,” said Buffett, “start with the A’s.”

This without a doubt remains the best investment advice for me and I can safely say for all those who are serious about investing. Though, I agree 100 % with Adam Smith – you aren’t going to get to 27,000 companies. So where do you start? The good news is that in India, there are only about 5,000 listed companies. So I guess . . . . start with the A’s!

The above conversation took place when the world was a really strange place. News did not flow easily and information was not available as freely as it is today. In many ways, internet has changed the way people do things. Courtesy the internet, I am able to reach out to all of you.

The World Wide Web is filled with millions of pages of material on the various investing opportunities. There are many tools to help you research and scan a list of companies based on a range of parameter such as – Industry/sector, size/market capitalisation, location…shareholding…. you name it1.  So looking beyond the ITC’s and Reliance’s of the world is not half as difficult as it was a couple of decades back.

One thing that has not changed (it never will) is that even today, everyone wants to find the next multibagger stock like what Infosys was a couple of decades back, and why not? Had you invested Rs. 1,000 in Infosys in the year 1993, today you’d be sitting on over Rs. 53, lacs, and this is without counting the heavy dividends which the company paid along the way. I agree, the real fun of investing is finding those golden nuggets which go unnoticed by the markets.

What I am going to give you today is an all inclusive formula in as far as the question of “Where to look for stocks?” is concerned.

For: Widely tracked Companies

Of course there are the widely tracked companies which are well researched by one and all. These are hard to miss. Just read the Business Standard or the Financial Express for a month and you will know about them all. They make up the numerous Exchange traded baskets. To make money in these companies do as below:

Step 1 : Make a list of companies in your circle of competence (i.e. look for business’s which you understand).

Step 2 : Establish a fair value for those businesses, keep a margin of safety which you are comfortable with.

Step 3 : Keep aside greed and fear and do this – “buy when the price falls below fair value and sell when it rises above it”.

For: Not so widely tracked companies

What about the hidden gems which will make up tomorrow’s large caps? Where do you even go to look for them? Two approaches, both based on a simple principal of refinement have helped me enormously over the years. First of these is refinement by elimination (top down refinement) and the second is refinement of everyday thinking itself (bottom up refinement).

Best Investment Advice

1.    Establish your circle of competence (i.e. zero in on the industry / sector or the kind of companies you are looking for) and research within that zone. You can use one of the many tools to find companies in this zone. I particularly like this one (click) where you can select companies based on industry/sector, market cap, ratio etc.

2.    Once you arrive at a refined list of companies, start your analysis. Study as many companies in your circle of competence as you can. Of course, depending on the nature of business you may want to cursorily exclude a few. For example, in the FMCG space, a company operating with a high level of debt is something I won’t be looking at. But try to cover as many companies as you can.

3.    Consider subscribing to a service which spends a lot of time doing this work for you. Not to drive my sales here but the truth is that we do exactly what we have written above which forms the basis of selection in our Research packages.

Remember: People continue to work hard; they continue to look for money to fuel their growth. This has been happening for many years and will keep happening in future. Research carefully and you will surely find those hidden gems.

I will tell you a story here. It was the year 2005. I was doing my masters in New York. I went for a talk where a very successful American investor spoke about how he looked for investment opportunities. He called his daredevil approach as “educated speculation”.

Remembering how he purchased a large number of shares in a little known company which manufactured security tags used in shops to prevent people from stealing garments he said, “when I first looked at a tag hanging from a jacket, it confused me”. This was a new concept back then (in early 90’s).

He immediately enquired from the sales boy about why such a tag had been attached to all the jackets. Is it fashion? I guess he realised that it would be extremely silly to wear a jacket with a little white plate hanging behind it. He was informed that this was meant to prevent people from stealing. In case he tried to walk out of the store with the plate still fixed to the jacket, it would beep and he would be caught. Rest assured, if he pays, he is free to take the jacket home.

What he took away from this was a simple notion: “People will not stop stealing and theft is a market which will continue to boom in future”. That evening he started a research on companies engaged in the business of security equipment.

Sure enough his refinement made him millions as this industry expanded.

 

Hope this helps you zero in on some high quality stocks.


1For starters and ease of use, this is a great tool:  http://content.icicidirect.com/newsiteContent/Research/CustomSearch.asp

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.