I take my work very seriously and thus have a defined methodology when it comes to building market-beating portfolios. My methodology, along with my set of ground-rules, forms the basis on which I make stock selections and make investment decisions for myself and for my clients. Please note that I invest in most stocks that I recommend to my clients. The reason is that the research process I use for investments of my own funds is the exact same process I use to recommend stocks to my clients. A summary of my stock-investment process is outlined below for the benefits of my current and prospective clients.
1. SHORTLISTING COMPANIES – There are around 4000 listed companies in India. Most of these are not fit for investments for various reasons. It is practically impossible for me (or for any analyst for that matter) to analyze each of these companies in detail. The good news is that it is not at all required. With the help of modern technology, we can now shortlist companies based on our well-thought-out criteria. I shortlist the companies that meet my strict criteria so that I am focused only on the very best options.
2. ANALYZING THE QUALITY – Then I dig deeper and look for the pluses and minuses of each company. This is what I call ‘deep research’. There are various aspects of a company which a potential investor should look into viz. the products and services which the company sells, its growth over the years, potential growth in the coming years, competitive strengths, management quality, cost-effectiveness, financial structure, research & development, etc. I take each of these components very seriously and analyze these in detail.
3. ANALYZING THE VALUE – Next, I find the real worth of the company. This is what is popularly known as fair value. This is important as I want to make sure that we don’t pay anything more than we should. If something is worth Rs. 100, I don’t want to pay Rs. 101 for that. In fact, I look to buy something worth Rs. 100 which is available at Rs. 50, before the market realizes its true worth [Yes. This is possible! :)].
4. ANALYZING THE FINANCIALS AND MANAGEMENT REPORTS – Then I move on to what the company has to say in its reports to its shareholders viz. annual and quarterly reports, conference calls, various declarations to SEBI, etc. A company’s profit and loss accounts and balance sheets are the summaries of its performance and no investment decision should be made without studying them in the proper light. I also consider the accounting principles followed by the company, so that I don’t get misguided by the figures shown in the company’s financials. The financials may not always show the true picture of a company’s financial performance and situation. I do proper due diligence to detect any misrepresentation or fraud that is not evident to a novice investor. Wherever necessary, I even talk to management, their channel partners and employees to have a better understanding about their vision and approach.
5. ANALYZING THE INDUSTRY – Finally, I analyze the prospects of the industry to which the company belongs by looking through costs, demand, competition, and regulations. We should understand that it is difficult for any company to do well if the industry is facing difficulties. So it becomes very important for us as potential investors to understand and analyze the industry well.
6. CONSTANT TRACKING – The above steps help me make my buying decisions. But that is only half of the job done. I track each component of my recommended portfolio virtually 24×7, and if anything negative happens which I think can be detrimental to the long-term prospects of the company I give an exit signal immediately. Although I generally do not exit a good company on every negative news that comes out, I keep my eyes and ears open to anything seriously damaging to the company. Also, if I feel that the price has reached the company’s fair value and is not expected to increase any further I sell the stocks and book profits.
The methodology outlined above is an extension of my philosophy about wealth creation (which you can read by clicking here). I know by experience that it is very easy for an investor to lose his/her focus amidst so much noise that exists in the investment arena. Televisions, newspapers and the internet is filled with information which is actually nothing more than entertainment, and is of no relevance to a long-term investor. But it is difficult to avoid everything. Sticking to the above-given methodology helps me to avoid unnecessary distraction and take correct investing decisions.
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