If you are one of the many like me, who got drowned in the sea of excess information then you are not alone. I was a trained analyst with all the right education and skills to make the right choices with investments.
With only one problem! The problem of not trusting myself with selecting stocks with some serious money. It all felt like a fairy tale when I used to hear people making money in the stock markets.
That only changed when I started my own business when I realised it’s much more uncomplicated than what the world can make it sound like.
So in this article, I will get you started with the framework of investing and allowing you much more confidence and freedom with your money.
Yeah, it sucks! I didn’t realise it until I was 30. The whole wisdom of playing it safe, or you need to be super intelligent and you need this experience and that experience. Woosh!
Throw it out of your brain window right away.
- You don’t need a finance degree
- No experience in fund management
- You don’t have to be brilliant and successful until now.
- You don’t have to know everything
- It’s easy
What I just wrote above are stereotypes created by the ones who don’t make money after all. The last point is real, it’s definitely not easy but it ain’t because of brilliance but hard work. It’s just plain hard work that sucks people out of this process. After all reading a 500 pager annual report of a company at 7 am in the morning, juggling through your chores consistently is painful.
Very painful indeed but the joys of doing it again, isn’t really the great bucks you make. On the flip side, you really don’t feel anything but the fun is realising that everyone has the same information but you looked.
Knowing your priorities
So what do you expect to gain out of this? A 50% return or a stock that makes you a millionaire in thirty-five days? Or do you put all your hardened money in stocks and expect your fortunes to change?
Quite the opposite actually, nothing really happens for a long long time. It really feels like starting at the unchanging summer skies, hoping it rains soon.
So I am going to list out some fundamental notes, I learnt from doing business and also reading some thousand books while losing some good money in the markets.
- We are talking and targeting a very long period of investment horizon
Are you in for an investment you do in a company and sit back to see the drama unfold for years? If not then this isn’t for you.
- Do you have the time to read and read and read some more?
If not then this isn’t for you too.
- Are you ready to be wrong many times?
After all, you won’t have anyone to blame, apart from yourself. So are you ready to feel that disappointment time and again? Whilst maintaining that enthusiasm?
The learning tools I mention here are recommended but not compulsory. If you can learn it yourself then great, if not then enrol yourself for some learning. Since I am hoping here, that you are going to approach investments with an objective to learn, hence learning some more won’t hurt.
You need to learn some accounting. It’s the language we speak in business and you are going to be directionless, without knowing the local language of business. So either enrol yourself in courses like financial modeling, which by the way I teach or learn it with some accounting tutorials on youtube.
A little bit of excel is always handy, too much is then intellectual massage.
- Intelligent Investor Book
Yea I call it a tool because it really is. I have read this book so many times that I have lost count but I still come back to it for all the answers time and again.
What to avoid
As warren buffet always says
- The first rule is: not to lose money
- The second rule is: Not to forget the first rule
You might be at this time thinking, that I am ready to lose money but I kid you not. People lose money because of hasty decisions and a lack of patience. Time and again you will be tempted to act fast, and the feeling of losing out on something.
Avoid looking at the stock market every day, it really doesn’t help in your research and neither does it change your decisions.
You need to stay away from hot stocks, IPO and anything that most of them are talking about. If lots of them are talking about it, chances are that it’s anyway too expensive and probably overrated.
You don’t find gold and diamonds where everyone is mining. You find it where no one is looking.
My last advice to get started on this journey is to stop giving tips or taking one. I have never made money nor will I ever make long-term money with someone else’s analysis.
No matter how good research you perform, the conviction is personal. I might send you a tip on a stock that I feel strongly about, but of course, you won’t have any idea when my convictions changed or what I am doing on a daily basis.
Alright, so we are all set to begin this!
In this process, I would be researched and invest with live capital. In the process, I would be sharing my insights and my conviction reasons. Also please do not copy what I do, but use it as an example to understand fundamental analysis.
My approach towards investing is derived more from the Benjamin Graham principles a.k.a warren buffet style. The main pillars of this investment method are
- Buy Good Business Cheap
The obvious question that might come to your mind might be, why would a good business sell for cheap? Well just like sometimes air tickets are cheap for a particular route. Prices of stocks going up and down or flat are a result of people’s attention. Frequently people can get drawn into hot stocks like IPO or stocks which are making their new highs.
So, I don’t want to buy stocks or companies which everyone is talking about today because that would definitely be expensive.
What’s the definition of cheap?
Price to Earnings
Simply it means companies with a Price to earnings lower than 15, and a Price to book value lower than 2.
Let me explain what is a price to earnings to you. Price is the current market listed quote for the company and earnings is ( the net profit per unit of ownership level).
So if I take the latest price and divide it by the EPS, you get P/E.
Take for example exide industries, the march 2021 profit was 810 which translates to 9.53 at per unit level.
If you divide the current market price, 150 by 9.14 then you get a P/E Ratio of 16.6. So basically I am giving 16 times their earnings as valuation.
Price to Book
Similar to the PE ratio, price to book is a ratio of the current market price to book value of assets. What is the book value of assets? Total assets of a company – total liabilities= Total equity(book value)
The price-to-book ratio is like a secondary check to ensure that we are not buying companies which are too expensive for their non-market values.
We want to look out for businesses which have been there for more than 10 years and sales of more than INR 7000 Cr( $1 Billion).
Well because you can’t do $1 Billion in sales without having a good product and reputation.
In the same category of companies, I also want to ensure that we have the following characteristics in the company’s fundaments
- No Loss for the last 4-5 Years
- Dividends if given have always been given
- Average earnings growth of 4% (CAGR), If you don’t know how to calculate then read this blog.
- Sales growth in the last 4-5 Years.
These filters ensure, that we have a business that is at least growing and doing what it’s supposed to. Which by the way creates value.
Strong Balance Sheet
I want to make sure the company I am getting into can survive the test of times. So the following filters are a good starting point
- Debt is lower than working capital( Working capital = Current assets – Current liabilities)
What that means is that the company has very low debt and hence the risk of falling short of debt repayment is low.
You could also look at it this way, the company has a very low chance of going out of business because of debt.
- The current Ratio is greater than 2
Current assets in financial terms, mean the raw material, cash and short-term investments of a company. Quite the opposite of current assets is current liabilities. So When I want to look at this ratio, the idea is to get a company, whose short-term assets are good enough to cover the short-term liabilities two times.
In the next blog, I will show you the list of stocks which got shortlisted and maybe you could match that list with your country and time too.