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The blog's takeaway - "The 1 aspect we should work upon before investing in any stock."
We're living in the age of social media 'FINFLUENCERS' (I'm yet to become one as I have terrible video editing skills). This emergence has brought a tsunami of easily available stock recommendations (good and bad) and every such recommendation brings with it a bona fide but irritating disclaimer - "DO YOUR OWN RESEARCH BEFORE INVESTING".
The disclaimer itself is necessary as it absolves the person giving the recommendation from all responsibilities. It also acts as a warning (really though?) for the people taking the recommendation. The reason I say it is irritating is, "IF I KNEW WHAT OR HOW TO RESEARCH, WHY WOULD I BE TAKING STOCK RECOMMENDATIONS ON SOCIAL MEDIA???"
We have two categories of BEGINNER investors:
SIGMA CATEGORY - For us, the sole criteria of selecting a share is that its share price should be below Rs. 20. Anyone investing in a share which has its share price above Rs. 1000 is dumb as hell!! Because 'WHEN' (not 'IF') our share climbs to Rs. 100 (just an increase of Rs. 80), our money will become 5 times!! A 400% return! And the dumb investor who bought a share of Rs. 1000, if that grows by Rs. 80, it is just an 8% increase! I LOVE the enthusiasm of SIGMA category investors and I miss the days when I was one. Life was way happier back then.
ALPHA CATEGORY - Those who know what is a PE (Price to Earnings) ratio, DE (Debt to Equity) ratio, EV/EBITDA ratio, Market Cap, ROCE, etc. We check some of these ratios before investing but we check it with a confirmation bias. We only focus on the ratios/information which confirms our decision (which we had already made before even looking for this information) and ignore any contradicting information. Most of us are category B investors.
Now, this particular blog is not for the SIGMAS, they have a good thing going on, let's not be party poopers for them. The real issue is with the ALPHAS.
We ALPHAS have spent some time on learning some basics of equity investing. We have show boated our knowledge in front of the newbie who has just joined office and feels that LIC is the best way to save tax, invest and get insured! The things is, the moment we start feeling that we know how to invest in stocks because we know the following stuff:
"A high PE ratio means, the company is overvalued and we should not invest in overvalued companies" -
1- Despite knowing this, we see Adani companies with absurdly high PE giving unforeseen returns.
2 - We see Mr. Sourav Mukherjea [If you don't follow him, you should. He's a rare breed of genuine people you see on Finance channels] tell us that PE ratio really doesn't matter, focus on the business and the cash flows of the company.
3- We get a counter view, that if the PE ratio of a company is low, there is a reason it is low!! You should stay away from the company
"If you think the fundamentals of a company are strong, keep adding on dips" -
1- After learning this fact, we see Mr. Nithin Kamath (Not less than a god for people like us) telling us that during a market dip and 1 stock falls and another doesn't and you invest in the share which fell, aren't you punishing the good stock for not falling???
2- The logics behind averaging down and averaging up, both feel perfectly reasonable.
3- And the most cliched quote in the recent times " NEVER CATCH A FALLING KNIFE!" (feels cool after saying this to people who haven't heard this before)
"Long term investing is the best for real wealth creation" -
1- Mr. Warren Buffet says, the best time to sell a stock is never and Mr. Mohnish Parbai gives a perfect counter by telling us that Mr. Buffet's favorite stock - COCA COLA went from $0.7 in 1982 to $44 1998, giving a whopping 6100% absolute return in 16 years but this very company with the strongest of fundamentals has gone from $44 in 1998 to $65 in 2022 a meagre 44% return in 24 years (Dividend returns are not considered here, but we get the idea). So is long term investing in fundamentally good companies really that good an idea?
Basically the idea is, there is an ocean of financial information out there and there's an equally big ocean of information which contradicts or counters the former.
For 1 person, a positive cashflow might be the most important factor, and another person might not even check the cash flow and just focus on the revenue growth or profit growth. 1 person might only rely on quantitative factors while for someone else qualitative analysis (management analysis, product lines, monopoly/duopoly status) might be the most relevant factor.
Hence, the most important aspect we should work on before we invest in a stock is that WE DEFINE OUR OWN INVESTMENT STRATEGY! We implement it in the market and we learn and we review and we redefine it until we get a strategy that works the best for us!
Let us know if you want Sabke Liye Investing to do a series on "What to research before investing in a stock?"
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