Sunday, 9 June 2019

How Anyone Can Pick Great Stocks

For most of us, good investing is about picking great investments. And that’s understandable. With a plethora of investment options available—many of which are substandard—it’s only natural that we should actively look for “great” investments among them. In fact, many fund managers, private-equity professionals and advisors spend much of their time in finding great investments. Of course, they charge you hefty fees for this service. What if you could identify such investments yourself? You won’t have to pay the fund manager and you will have greater control over your portfolio. 

Finding great stocks is easier than you thought. But you will have to open up your eyes. If you track businesses, good businesses are right there in front of you. You deal with them; you consume their products. Such businesses have stood the test of time. In the Indian market, some of such companies are HDFC Bank, Kotak Mahindra Bank, Hindustan Unilever, Dabur, TCS, Maruti Suzuki, Britannia, ITC and so on. Why shouldn’t you invest in them?

Investors face a few problems while investing in this “simplistic way.” Because these companies are clearly visible, they don’t arouse much interest or perhaps thrill. What arouses interest is what’s not widely known—that stock which you discovered after weeks of analysis and that nobody knows about but you. Secondly, the “already discovered” companies are expensive in valuations. Classic investment science says valuations are crucial, so investors give such discovered names a miss. Yet another category of investors feels that large companies can’t give smashing returns as mid and small caps do. Further, some investors feel cheated if you tell them the names of such stocks because they already know them. They want to know something new.  

The world of investing has been made complicated for no reason. While most experienced investors and analysts stress the need to be simple, they do just the opposite. This results in countless theories and models that try to pick the “winning” stocks and “beat” the market and the peers. It appears that investing were a game where only one person or a handful of people can win. If you “score” less than your neighbour, you have failed. 

Investing in already-discovered stocks should be the core of your investing strategy. Don’t worry about valuations much. Such stocks seldom come cheap, given their quality and robustness. They move slowly but then they also won’t likely fall the way mid and small caps do. Over the long term, the returns from the popular stocks add up to become significant. Invest in them for the long term; don’t get obsessed with short-term ebb and flow in them or their financial performance. Such companies have a history of weathering the storm. In short, they are boring but effective. 

Once you have made a core portfolio of such stocks, you can go about hunting for the next stars. This will make your overall portfolio prepared both for the next bull or bear market.  

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