Kunwar Raj explains how beginners can follow a very practical approach for finding stocks for long term investing and building a decent portfolio.
The Indian stock market has more than 5,000 listed companies. A beginner can feel overwhelmed looking at this number and thus fall for scams that give guaranteed tips to earn high returns.
In reality, finding stocks as a beginner requires some of the most basic rules and then one can further dig deep into these stocks.
When someone is starting their investing journey, they are often confused about multiple things like what amount to invest, which stocks to buy, how many stocks should they have in their portfolio and so on.
I have been investing in stock market for last six-seven years. This article will help beginners to create a very practical approach for finding stocks for long term and building a decent portfolio.
Everywhere I go I see stocks
We often complicate simple things and the same holds true for finding stocks. Stocks are literally everywhere around us.
For example, you brush your teeth in the morning and see the stock: Colgate. You bathe and see Cera fittings and Kajaria tiles on the floor; two more stocks are discovered -- Cera Sanitaryware and Kajaria Tiles.
Next you use toiletries from brands like Dove and Clinic Plus, owned by Unilever. You eat paratha for breakfast -- made from Aashirvaad Atta -- owned by ITC; idli made from Dawat rice -- a brand of LT Foods.
You wear clothes of Westside or Peter England -- brands owned by Tata and Aditya Birla Fashion respectively.
You travel by a Tata car or a bus. Now that you have a bucket of stocks, it is necessary to curate a list from that bunch.
The method of inversion
The only single thing one needs to do is identify a few red flags that will help to eliminate 80-90 per cent of the entire chunk you have selected to invest in.
- As a beginner one should strictly avoid loss making companies like Paytm, Zomato, etc. Even though you have the confidence that they might do better in future, avoid it when you are starting out.
- Identify companies with high debt. Those companies whose debt-to-equity ratio is less than 0.25 is the best bet for someone as a beginner. Because in black swan events like pandemic, debt heavy companies face difficulty to survive and thus won't make you any wealth too.
- Check if the company and its management have a good track record. A simple Google search will let you know all the scams or fraudulent activities that the company or its management was involved in the past. Corporate governance should be among the top-most filter while shortlisting the stocks for investing your money.
- Avoid companies with a market cap of less than Rs 100 crore, or generally identified as micro-cap companies. There are high chances of manipulation in such stocks, and it has total potential to drain down your invested capital to zero.
Understanding the businesses
After identifying red flags using the method of inversion explained above, it is very easy to dig deep into the quality chunk of stocks in your basket.
- The first step towards understanding any business is to read its annual reports. Annual reports have end-to-end insights about company's past, present and future plans.
- One can also refer to investors' presentation. It is a brief presentation about the company's business and its future plans. Referring it can help to get a major overview.
- One should also attend conference calls set up by companies after quarterly or annual results. The board discusses multiple things, and you can understand how confident they are about their business and its future.
- Insider trading is am indicator of promoter's confidence in the business. If a promoter is buying a stock, there are high chances that something good is going to happen with the company. You can check insider trading history on SEBI's Web site.
Tools to use for your research
Research is a very easy process; it is just the psychological fear that we are afraid of. We research deeply when we buy a new smart phone or a gadget or a car, but we rely mostly on random tips for investing in stocks. These tools will help you in fundamental research of stocks.
- LinkedIn & Glassdoor: A very unconventional way to research, but they have potential to give information that no platform can give. Reading employees review on Glassdoor can give you a great insight into the company culture and talking to the management of a competitor company can give you real insight of the industry.
- Screener: This tool is like Microsoft Excel on steroids and the best for stock market. You can get a very clear historical data of all the companies along with a brief introduction about all of them.
- Simply Wall Street: This tool is the best and I have been using it personally for last 2-3 years. The tool gives a visual and graphical representation of the fundamental analysis of the companies. It also gives intrinsic value of a stock based on the discounted cash flow model. It helps you to identify if the stock is overvalued or undervalued at the given price in the market.
Do not copy big bulls' portfolio
When someone starts out their investing journey, the first thought is to copy big bulls' portfolio and make big profits as they do. That is really a bad idea because of a few reasons.
- You don't know the exposure that big investors have in particular stocks which are part of their entire portfolio.
- You don't know their investment philosophy behind investing in that stock; it might just be a bet too!
- You can know about a big bull's buying or selling only when they have a stake of 1 per cent or more in the company and that too after a few days.
Investing in stock market is not a difficult task, but not an easy one too. Following these steps can help you to kick start your investing journey in the stock market. Once you do that, there are a lot of free resources to learn fundamental analysis and all the ratios in the world that can help you to be a better investor.
Investing in the stock market is like ageing wine -- it gets better and better with time. Take it slow and seek advice only from SEBI registered investment advisors and research analysts.
An IIT Roorkee alumnus, Kunwar Raj is the founder of Unfinance