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Fundamental research of investment

Fundamental research of investment

We need to understand that normal problems which investors faces with equity investment is-

Lack of knowledge- Most of the people don’t have knowledge on equities

o In terms of study of financial statements like Balance sheet/ Profit and loss account

o Meeting promoters and management of companies to understand the practical aspects of the companies

o Regular up-dation on new happenings on the companies

Controlling emotions while managing the money in market. Small investors goes by the emotions many time at the time of management. Even if sometimes stock is weak fundamentally, investors seldom like to book losses considered the fact that in long term most of the stocks will perform.

Myth that in long term all stocks will perform. But in real world portfolio will give returns if investor has picked right stock for long term

Investor need to focus on Following points at the time of investment:

While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let’s review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

  1. Sell the Losers and Let the Winners Ride!

Investors generally doing a mistake that taking profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn’t know when it’s time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:

Riding a Winner – Peter Lynch was famous for talking about “ten baggers”, or investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple – say three, for instance – you may never fully ride out a winner. No one in the history of investing with a “sell-after-I-have-tripled-my-money” mentality has ever had a tenbagger. Don’t underestimate a stock that is performing well by sticking to some rigid personal rule – if you don’t have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

Selling a Loser – There is no guarantee that a stock will bounce back after a protracted decline. While it’s important not to underestimate good stocks, it’s equally important to be realistic about investments that are performing badly. Recognising your losers is hard because it’s also an acknowledgment of your mistake. But it’s important to be honest when you realise that a stock is not performing as well as you expected it to. Don’t be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses. (For related reading, check out To Sell Or Not To Sell.)

2. Don’t Chase a “Hot Tip.”

Don’t be greedy in stock market. Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn’t accept it as law. When you make an investment, it’s important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it’s also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run. (Find what you should pay attention to – and what you should ignore in Listen To The Markets, Not Its Pundits.)

3.Focus on Capital and Risk Management:

Never invest your maximum capital in a single stocks or in stocks related to same industry. Diversification of the portfolio to include stocks from different sectors reduces the overall risk of the portfolio. Different sectors have different trigger points. Hence, a weak performance of a stock from one sector may get compensated by a strong performance of a stock from another sector. Capital diversification is must among leader business of leading industries . Well said by Legendary investor Mr. Warren Buffet: “Don’t put all your eggs in one bucket”. If you are investing in midcapstocks then you should know that midcap always overreact with market movement. So one can minimise the risk by making balance among large cap and mid cap stocks with proper capital allocation

4. Don’t react much to 20% upside or downside movement:.

As a long-term investor, you shouldn’t panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don’t overemphasise the few cents difference you might save from using a limit versus market order.

Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement – the one that occurs over many years – so keep your focus on developing your overall investment philosophy by educating yourself.

5. Don’t Overemphasise the P/E Ratio.

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn’t necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued. (For further reading, see our tutorial Understanding the P/E Ratio.)

6. Resist the Lure of Penny Stocks.

There are very less information available on penny stocks. A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you’ve lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price , which would have more regulations placed on it. (For further reading, see The Lowdown on Penny Stocks.)

7. Pick a Strategy and Stick With It.

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett’s actions during the dotcom boom of the late ’90s as an example. Buffett’s value-oriented strategy had worked for him for decades, and – despite criticism from the media – it prevented him from getting sucked into tech startups that had no earnings and eventually crashed. 

8. Focus on the Future.

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It’s important to keep in mind that even though we use past data as an indication of things to come, it’s what happens in the future that matters most.

A quote from Peter Lynch’s book “One Up on Wall Street” (1990) about his experience with Subaru demonstrates this: “If I’d bothered to ask myself, ‘How can this stock go any higher?’ I would have never bought Subaru after it already went up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that.” The point is to base a decision on future potential rather than on what has already happened in the past. 

9. Adopt a Long-Term Perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the “get in, get out and make a killing” mentality is a must for any investor. This doesn’t mean that it’s impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don’t experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other – both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire. 

10. Be Open-Minded.

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while theStandard & Poor’s 500 Index (S&P 500) returned 10.53%.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains. 

11. Be Concerned About Taxes, but Don’t Worry.

Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you’ll want to put tax considerations above all else when making an investment decision (see Basic Investment Objectives).

The Bottom Line

There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we’ve discussed benefit you overall and provide some insight into how you should think about investing. If you want to have more detail discussion, please call us at 8553585156 or drop a mail at jayesh@sublimeadvisory.com

Type of Major Risk Related to Stocks:

One should consider following risk factor before choosing stocks for longterm investment

1 Market/ Economy Risk: The performance of any company depends on the growth of an economy. An economy, which continues to prosper, ensures that companies operating in it benefit from its growth. However, an equity shareholder also runs the risk of any downturn in the economy affecting the performance of his company. Economy related risks are usually reflected in the factors such as GDP growth, inflation, balance of payment positions, interest rates, credit growth etc. A slowdown in the economy pinches almost all sectors, especially infrastructure, services and manufacturing companies.

2 Industry Risk: All industries undergo some kind of cyclical growth. Shareholders get rewarded most during the expansion stage. For instance, the last few years have been very rewarding for investors in real estate. However, once the industry reaches a maturity stage, the rewards from investment are limited. Further, companies belonging to industries where growth has retarded incur losses or declining gains. Industry specific government regulations too impact returns from investments made therein.

3 Management Risk: The management is the face of an enterprise. It is the team which gives direction to the future course of action that a company will take. Quality of management is hence paramount. Management changes often have a serious impact on policy matters of companies, thereby impacting the share price. A management which is unable to meet the challenges posed by competition is likely to suffer in performance.

How to overcome risksMost risks associated with investments in shares can be reduced by using the tool of diversification. Purchasing shares of different companies and creating a diversified portfolio has proven to be one of the most reliable tools of risk reduction. 


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