I came across a Question on Quora, the Q&A website, and would like to share my Answer here:
THE QUESTION WAS – HOW DO I START VALUE INVESTING?
To a new individual investor, learning Value investing can open the doors to wealth and a nice side income. In fact if Indians take to investing like in the developed countries, half the population may eventually have at least some money in stocks.
HERE’S WHAT TO DO:
You may find some points are from an Indian context:
- Start by looking at your finances. Can you set aside some money for a 2 year period without needing it, and which if your experiment fails, you can lose? This is your seed money.
- Get a brokerage account. If you are internet savvy, online only accounts are sufficient. Look for convenience and low brokerage. Buying or selling a share today is as easy as eCommerce.
- Next you need to find listed companies whose products or services you (or people around you) love. It could be your bath soap. Or your savings bank. Or your biscuit snack. Whats the brand? And company. Connect backwards. Use moneycontrol.com to see if the company is listed.
- Now Research this company identified. What else do they make. How are their finances. Who owns the firm. Are the promoters good people. Have they done well in the past. What are growth plans. There are some financial ratios that you need to check. The P/E, P/B and D/E should not be too high. Look for companies with high RoE. There are other ratios, but this is a good start. Value stocks are those that are worth much more than indicated by their current share prices. The research can result in a fundamental thesis for a company, like “with a new factory revenues will grow 45% and profits 60% in 2 years”, or “the 40% fall is share price is unjustified and we expect a full recovery plus 20% based on growth of financials”.
- Investing is like growing a tree. It can’t be hurried. It needs care.
- If you feel good about the research for a certain company, start your investing exercise by buying a few shares, a fraction of your seed money, say 20%.
- Repeat above exercise in some time to find 2-3 more companies and add 20% of the seed money for each. Track these firms for a few months. Keep reading up about them. See if the news flow is positive or negative.
- Review your company in 3-4 months by relooking at (4) questions periodically, say after the quarterly results. Sell the company if (4) answers on review don’t add up or price has gone too high. Buy more if the company performance is good but price goes low.
- Remember, a fall in share price and a notional loss for you is not necessarily a sign of a bad company. Check against (4) questions. Similarly the converse. A gain in share price may not necessarily be the sign of a good company.
- Build your learnings. Find non consumer companies that you understand or are comfortable with, to invest. Read books by great investors like Warren Buffet, Peter Lynch and our own MohnishPabrai. Keep learning.
- Cut out investing noise. Any stock tips you get should only be starting point for research with (4). There are a lot of hot stock picks floating around. But who is tracking it for you?
- Both greed and the pain of loss will hit you over the years. There will be times where you see a 30% notional loss in a share. Just check against (4) questions for buy and sell decisions. Try to stay satisfied with past decisions, while learning from them.
- Be humble. You will be wrong many times, but you have to bounce back.
- If you get it right, over the years you can outperform the Sensex / Nifty Indexes, equity Mutual Funds and Portfolio Managers. If you grow in learning and confidence over months and years, as does your portfolio, this door has opened for you. Congratulations.
- This is how I did it. This is my process and some lessons learned over 12 years as an investor. I am now a SEBI registered and certified Research Analyst.
- Visit JainMatrix Investments (http://www.jainmatrix.com/) to fast track your above process, or to get an experienced stock market Analyst to partner and help you. Note that not everyone can be a good value investor, or even spare the time required. A section called Investor Education (https://jainmatrix.com/2015/06/03/investor-education/) has been created only to guide you along.
- Read Disclaimer below also … one point from there I would like to emphasise is – The suitability or otherwise of any equity investments will depend upon the person’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor.
This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst (SEBI Registration No. INH200002747) and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at firstname.lastname@example.org.
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