My 7 points for stock selection
The first stock I bought was PVR @ Rs 704 in September 2014. In two months it reached Rs 605. However, I was sure that it will go up. My logic was simple: more than 50% of the population is below 40 years who love to enjoy cinema at weekends. I observed that ticket price and advertisement revenue was soaring high day by day. Even though, I was sure that the stock would double soon but I could not control my temptation and booked profits at Rs 1000. The first lesson from my first trade I learned was that even after making some profit one could regret. I realized that the right time and right valuation is applicable and important not only while buying but also while selling as well. At that time I had no idea about stock evaluation.
Almost one year later in 2015, I bought 100 shares each of SBI @ Rs 303, PNB @ Rs 211 and ICICI bank @ Rs 353 considering them safe bets, trusted management, and their proven track records. However, I had to book loss and sell SBI @ Rs 230, PNB @ Rs 144 and ICICI @ Rs 290 in few months time. From my second outings I learned three lessons – you cannot buy anything blindly even if they happened to be market leaders; always give priority to valuation before buying as well as equal priority to stop loss and the last lesson – always follow diversity in portfolio.
I was very naive but very passionate about businesses and eager to learn new things. In the last four years, I have read a lot and met a few veteran investors. I am still learning, which is an unending process. With the little bit of acquired knowledge and experiences I strongly believe that capital protection should always be the first priority. I continuously try to minimize the risk and uncertainty while selecting a stock.
I follow my own-preset principles which I would like to share with my fellow readers –
- I must know the story behind the stock/business, understand the products and market need (Monopoly and niche businesses are preferred). Unique business idea and monopoly of the products are the key ingredients which attract me to dig deeper.
- I give much importance to promoter’s holding, pledging %, and integrity of promoters. I know I’m putting my money on promoter’s abilities and if they are the right people I will be surely rewarded. Secondly, if pledging percentage is high then there is chance of losing my investment. If promoters have ethically good track record it gives me confidence.
- I watch out expansion plans/ fixed assets/ cash reserves/ debt repayment. If companies are expanding their operations, it will soon be reflected on the top line and bottom line and share price as well. For expansion plans the mode, how company is managing funds (internal accruals, pledging shares, and short term borrowings), is an important aspect.
- I search for the parent company, if there are any (reputed foreign company as a promoter preferred).
- I consider ratios D/E, OPM, P/E, P/Bv, Market cap/sales, ROA, ROE, ROCE, depending upon the sector of business. These ratios provide answers to many questions that crop up in my head.
- I must know the cash flows (Most importantly operating cash flow, positive is always preferred). I usually read reputed business magazines, annual reports. I regularly visit the Company’s website and screener.in.
- Last but not the least – I must know my holding period. We all have short-term (1-2 years), medium term (3-5 years) and long-term (8-10 years) goals. For short term, I focus more on valuation. For the medium term, I look for the growth and nature of the business cycle. For the longer term, I seek only quality. However, I prefer quality every single time.
I have developed these 7 points for stock selection over a period of time and I am still learning. One thing I want to learn profoundly is cutting losses quickly and riding on profits for a longer time. I want to express my deepest gratitude to Rajni Sanghvi, Vishal Kothari, Sameer Shah, Jaydevsinh Chudasma and Ankur Gadhvi for always shaping my views and guiding me.