Since I have started investing in equities, a lot of my friends are asking for stock recommendations and prices at which they should buy the stocks. According to me, these questions should not be asked and that buying simply based on ‘tips’, will be a disaster in the long run. Stock tips most often create artificial price hikes due to excessive buying and covertly benefits the company releasing the tip. The Stock market isn't a gamble and your money does not grow on trees. A proper research and groundwork can help you take an informed decision.
Two famous quotes which I always remember before investing in stocks are:
“If a business does well, the stock eventually follows”, this means, stop relying on tips, do your own research and buy businesses which match your style the best.
“Time in the market is more important than timing the market”, meaning, stop searching for the correct price as this is a long-term game.
Following things should be kept in mind before investing in a stock:
Qualitative Analysis: It uses subjective judgement to analyze a company’s value or prospects based on non-quantifiable information. There are 6000+ listed companies in the stock market and there’s so much of untapped potential.
1) Management: I have put this first because I believe understanding the management of a company should be an investor’s top priority. Management consists of promoters and top-level managers. Long-term investors, before investing in a stock, conduct company meets. These meets are as important as the business model and financials of a company. Basic things like handshakes, the enthusiasm to communicate, and the overall treatment- all of this shows the management’s warmth! Because, if the management can't behave well with you, there are high chances they don't with their employees, creditors, customers, government, etc. Along with that, meeting the management gives you a deeper insight into their expertise, the future goals of the company and how positive they are of the growth plans. At this stage, we won't be able to conduct such meets, so I take help from an investor forum called www.valuepickr.com. Investors who are following the company for a long time put their valuable insights and concerns about the company.
2) Business: According to Warren Buffet, you should spend most of your time focusing on great businesses. Time and money are too valuable to waste on researching or investing in a sub-par business.
Understanding the business model: When I start researching a company, I make it a point to understand the business from A to Z. This is typically related to material, machine, manpower, and money. There are some industries I don't touch upon because I find them difficult to understand. For example- Healthcare. It is divided into Hospitals, Pharmaceuticals, Diagnostics, etc. and they have a very dynamic business model. You should always invest in businesses you understand. Buffet always looks for simple businesses that even a layman knows. Eg- Coca Cola.
Pricing power: Another important factor is price competitiveness. For example, airline businesses are shutting down because they have used the method of deep discounting for years. A simple way of seeing this, is that if a company increases its prices, will the customer still be willing to buy their product or not?
Brand: Pricing power leads to the brand image of the company. Investors love to invest in B2C companies more because they are known to the general public and have great brand recognition.
Competitors: It’s very important to know who you’re competing against and will they pose a threat in the near future. I spend most of my time understanding the business of the company and use various media for the same. Some of these include- Official website, Annual report, and research reports by brokerage firms on www.trendlyne.com.
3) Capital Expenditure (CAPEX) plans: CAPEX tells you how much a company is investing in existing and new fixed assets. It is important to know the reasons of capacity expansions and how they are financing them. These are long-term expenses for long-term growth. Nobody wants to invest in a stagnant company right? Listening to quarterly con-calls and reading investor presentations are very important in understanding the current activities and future plans of the company. You can find them on www.researchbytes.com.
4) Industry: It helps us get a sense of what is happening in the industry i.e. demand-supply statistics, degree of completion, future prospects of the industry, technological changes, and lastly, the influence of external factors. I asked my Sir last year why well-known Pharma companies in India who had good results with increasing profits, still experienced a fall? He said, most of India's Pharma market run on Generic drugs (copied ingredients) from its counter-parties abroad and a lot of it is exported as well. Hence, changes in the global Pharma market affect India drastically. That is when I understood the significance of Industry analysis. www.ibef.com is a good site for getting an overview of different industries.
Quantitative Analysis It is a study of numbers and no Equity research is complete without studying the financial statements of the company. I use www.screener.in. & www.tijorifinance.com. to check quick financials of a company.
Hope this blog was informative and helps to give you a kickstart in researching & investing.