A lot of people keep asking me to suggest 8-10 stocks, which they could make a part of their long term portfolio. How about trying and picking the stocks himself/herself following some simple rules? In this article I would like to talk about certain things which investors can look at before buying a stock so as to ensure it is a good investment. More suggestions from readers would help me and many other readers also learn something more.
Stock Selection Criteria -1
If I think I spotted a good stock I would try and look at the shareholding pattern on the company. If no institution (FII's, big Mutual Funds) own it then its good news for me. Then I would try and search the net to see if analyst cover this stock. If I find no analyst research reports on this stock then for me its a sure buy. To many this might sound surprising but its a fact that if you find a such a stock before analyst and FII's do then you will surely do well owning it. Of course all other factors need to be checked as well (fundamentals and business).
Always remember when a stock is too much in news and limelight it is already overvalued. So most of the times you will do better buying a stock which hardly anyone knows about.
Stock Selection Criteria - 2
Try and invest in companies where insiders are buyers and even the company is buying back its own shares. People working in the company, putting money in the stock of the company is one of the biggest indicators of the health and future of the company. The insiders know more about the company then any of us. Similarly if a company is buying back its shares it shows the confidence the management has in their business. Its also one of the greatest indicators of a company having faith in their own future.
In the same way when applying for an IPO look at how many times the employee portion of the offering has been oversuscribed. The greater it is the better is the company.
Stock Selection Criteria -3
Invest in companies whose products people have to keep buying or products which are a necessity. These companies will never do badly unless they do something amazingly stupid. So soaps, razor, blade and even cigarettes is something which people will keep buying and using. Its better to invest in these companies then to invest in a company which is a maker of Television, Fridge etc. These products are not a daily or even a yearly buy.
Stock Selection Criteria - 4
Invest in companies which has got a niche product. The examples of these companies can be largely found in drug, chemical and even some technological companies. These companies have certain products which no one else is allowed to make. So if a company has got a multi year patent for a exciting product then the company is a sure buy.
Stock Selection Criteria- 5
Invest in companies which are not super growth companies. This again would look surprising to many people. But just go back and look through the past and you will observe that companies which have growth at 80-100% for 3-4 years fail miserable later. Its better to own companies which are growing at 25-40%. This in my opinion is a safe range for growth. Remember: What goes up fast also comes down fast.
Stock Selection Criteria - 6
Invest in technology users and not technology producers. This theory varies from case to case and might not be applicable in some scenario.
But to make things clear let me give an example. There are many computer makers in the market and hence there is big price competition among them. This leads to lowering of prices which affects the company margins. But suppose there is another company which is a major computer user. This company would stand to gain because of the price competition. So its better to invest in the computer user then the computer makers. This theory will apply to whole lot of industries if you think carefully.
Stock Selection Criteria - 7
Look for companies which have valuable assets. There are many companies listed in the Indian markets which have got valuable assets like a large piece of land in a prime location in a city. At times markets and analyst miss out on pricing these assets. So if investors find a company trading at a market capitalization near to its asset value or less then it then its a screaming buy. For this investors need to study the company and its annual reports well. Also knowing someone in the company halps.
These things which I have listed down are mainly not related to financials. So any investor can check out for these things before investing. In my opinion following these rules will surely help in making better investment decisions.
I would also try and list down some simple things one can look into company financials to at least have some idea of its fundamental strength.
Some Companies Which Every Investor Should Avoid:
- Companies which are making new forays and diversifications every other day. These Companies are not sure what they want to do.
- Companies which get major chunk of its revenue from one or two clients. Imagine what would happen if these clients stop giving orders.
- Companies which have very high FII and Mutual Fund holdings. Because they have already been too much into limelight and are overvalued already.
Some things Investors should not try doing:
- Investors should not try and predict the stock markets. If you think i am wrong then try it out. Its impossible to try and predict the market movements. So its better just to think about the company and invest according to its business and prospects. Dont try to time the markets.
- Predicting the economy is also of no use. This is also something no one can do. Mr. Bernanke first said that the
A Few Good Stocks have low or no FII Holding:
- Siemens Healthcare Diagnostics Ltd.
- Gujarat Reclaim & Rubber Products Ltd.
- Honeywell Automation India Ltd.
- Gillette India Ltd.
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