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Setting up Investing Rules: Rule 1 and 2



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In our earlier lesson, we just touched about introduction to *Fundamental Analysis* and *Technical Analysis*

We said, *Fundamental Analysis*, is the detailed study of:

1. The company, its business, its financials, its valuations, its cash flow, its balance sheets etc.

2. The industry / sector in which the company operates

3. The market on the whole

4. Micro and Macro news that impact all the above.

While in *Technical Analysis*,

1. we use charts and graphs

2. to predict the correct entry price to invest in a stock

3. and the correct exit price to book profits

For a stock market participant, both the methods are useful and essential.

In general,

  • long term investors* need to be very strong in fundamentals over technicals.

And

  • intraday traders* need to be strong with technicals over fundamentals.

I already told you, we are NOT Trading. We are Investing!

Investors put money for the *long term* (generally over 1 year period) in anticipation of company to perform.

So, for them fundamentals are more important than technicals.

Our individual conviction of the stock is very important when we are investing.

Because long term investing will mean we will be investing, holding, studying and tracking the company for years together.

Do not invest if you are not comfortable with the stock.

Your own conviction of the stock is more important that that of an expert who recommends it.

Experts do not generally invest their own money in every call that they give.

They just analyse and give calls.

But as an investor, we need to analyse and risk investing our money into companies.

So if you are not comfortable with a stock, avoid it.

The market is full of thousands of stocks.

There are opportunities available at all time.

What we need to do is a proper study before putting our leg into the water.

As part of Fundamental analysis,

apart from studying the company / stock,

we need to study the sector / industry to which it belongs.

Sector / Industry section

In stock market, there are several thousands of shares.

In order to decide on the best stock / sector to invest, we will have to filter them out by eliminating.

The first step in this is by identifying some good sectors.

Some good sectors that are generally evergreen and good for long term are:

Autos (2 Wheelers / 3-wheelers / commercial vehicles etc) Banking / Finance (including NBFCs) IT (includes BPOs) Pharmaceuticals (and health care) Power (includes Energy companies) Oil / Petrol (and petrochemicals and refineries) Metals / Minerals Engineering Realty

...

Assignment

I want u all to do a small exercise now.

Can each of you give me one listed company name from each of the sector?

Message me personally with one stock name from each of the above categories

This is an important activity. Everybody, please do attempt it.

This is an important activity because the stock market is full of several stocks.

When building a portfolio, we generally will short list few sectors.

And from each sector, we need to get one or two fundamentally good stocks.

Given a stock name, you should be able to tell the name of the sector.

For example, answer this:

To which sector does Maruti Suzuki belongs to?

Now, given a sector name, you should be able to tell the name of a stock that belongs to the sector.

Name a listen company from the Health sector?

Just knowing names of good stocks is not enough.

Now that we know some good and well heard names of some companies, can we start investing in them?

After all, they are some good names from their respective sectors. So they should be giving us good returns.

Nooo. We need to study the "fundamentals" of the company before deciding to buy.

Do not get tempted by the looks of the companies.

U need to use fundamental methods to answer:

1. Is the company and its management a good one?

2. If so, is the present share price a good price to buy at?

3. Are the financials of the stock strong enough?

4. Are there any companies better in the sector / industry?

Got it?

Now, lets move to the important question: In which stocks should I invest?

For any investment to give us profits and to create wealth, it should be a good quality one.

Quality factors of a stock can be determined by various aspects:

1. Fundamentals: Company / Promoter / Management etc.

2. Valuations: Determination of a fair price etc.

3. Financials: Ratios, Quarterly and Annual data etc.

The first important thing to do in stock picking is:

Do not go blindly at people who give tips.

Instead, spend time to learn and understand the rationale behind the tip or their suggestion.

Rule #1: Do not invest blindly on tips, suggestions or calls given by others or because someone invested in the company.

“It is better to live your own destiny imperfectly than to live an imitation of somebody else's life with perfection.” ― Anonymous, The Bhagavad Gita

Now, this is a hard rule to stand by..

because as an individual we might not have the expertise to study stocks all by ourself.

And the market has no dearth of advisors..

but the funds we can invest in the markets is always limited.

If you want to take a deviation to the above rule, limit yourself to following one company per expert only.

Seeking guidance and help from a qualified and experienced financial or investment advisor is always good ..

but you should not trust advisors whom you have not met or those whom you hardly know..

particularly strangers in WhatsApp groups and those who send bulk messages giving buy recommendations.

Prepare some notes given by the expert about the call. In particular, you need to understand:

1. The company, its business, risks and opportunities.

2. Investment time frame, entry and exit price points / conditions.

3. Major milestones / orders in the pipeline etc.

Be mentally prepared that you might have to invest double to what you have invested in that company (to average later) in case the call went wrong.

Also be patient to hold the stock for twice the time frame period that is suggested.

You should understand irrespective from where you got the investment idea, you are utlimately responsible for the investment decisions you make.

The key to investing responsibly is having a well-considered investment strategy.

When you buy shares of a company, you should note down the circumstances and conditions that helped you to make the decision.

What is your financial situation at the time of making the investment? your loans? and situation of your spouse?

If possible, you should also consider your time frame and target returns expected or as to when you should exit from the investment.

If u dont understand the business of a company, do not invest it. There is no obligation to buy it.

You need to spend a lot of time to identify good quality stock and its business.

Investing takes few minutes. Studying a company takes hours and days.

The first thing u have to do is to look at good quality companies to invest.

This is easier said than done.

Why?

Because we have thousands of shares to chose from and we dont know which are good ones and which are bad ones.

Please note down these filtering points:

Prefer companies that are listed on both NSE and BSE.

Refrain from stocks that are listed only on BSE

NSE = National Stock Exchange

BSE = Bombay Stock Exchange

Why?

A stock listed on both NSE and BSE will have more trades and investments done than on BSE alone.

Also NSE has more stringent quality norms in terms of stocks listed on it.

We find lot of very small companies listed on BSE alone.

Small companies with low volumes are easier to manipulate.

Further, BSE has daily, weekly, monthly and yearly price limits within which the share price is allowed to move.

With so many things into mind, investing in BSE-only companies may be risky.

Right?

My personal experience says, stocks listed on NSE + BSE are of higher quality than BSE-alone.

I will tell the rationale in our later sessions.

Why there is price brand restriction in BSE and not in NSE?

BSE has more companies being listed. BSE is liberal interms of allowing a company to be listed. This has brough many companies beign listed in it but there are several companies that have never traded for even 1 share per day. Such shares have become the playground for operators to manipulate stock prices. To curb this measure, BSE has introduced the concept of price band restriction.

The restriction applies for BSE-listed companies only.

Rule #2: Prefer investing in companies listed on both NSE and BSE. Avoid companies that are listed only on BSE.

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