A few important points I follow while investing in stocks-
- As an investor I prefer to buy simple businesses that I can easily understand.Even stocks of companies that sell cookies, biscuits cold drinks can give life changing returns.
- The more complicated a business, the harder it will be for it to be profitable.I have seen companies making ships, submarines and fighter jets that have been on verge bankruptcy.
- I stay away from sectors that make losses most of the time.
- I stay away from stocks and promoters that have a history of destroying investor wealth. If all the past ventures of a promoter have been a disaster, the future ones are likely to be no different.
- Companies that can’t even pay interest on their debt cannot be considered an investment at any price.
- Leveraged companies with high debt/equity should be considered as investment only when the management is capable of generating significantly large return on capital compared to the cost of capital and has a proven track record.
- Companies that keep on adding debt in bull markets to fuel growth, without any concern of paying back often end up as wealth destroyers in bear markets.
- Most sectors are cyclical.High growth rates cannot be sustained forever. Buying even great stocks at high valuations reduces long term returns. A 40 PE stock can easily become a 20 PE stock in matter of months on change in sentiment.
- On the other hand a stock trading below its book value can be a multibagger with change in market sentiment.
- Holding onto bad investments generally increase the losses.Averaging them down increases losses exponentially. Best to book small losses and wait for opportunities to re-enter at a later time.
- Similarly averaging-up or a SIP is also not a great idea. Whenever markets correct eventually, most of your gains get erased in a flash. Suppose you buy 100 shares of stock X at price of 100. Then you average-up at 150 by buying another 100. Now you have 200 shares at avg price of 125. Now it will only take a 17% correction to wipe out all your gains of the 50% up move.
- As illustrated above, SIPs cannot be a substitute to hard work. Buying the right stocks at bargain prices when markets are pessimistic and selling in euphoria will easily deliver market beating returns while SIP returns are just mediocre.
- A ‘buy and hold forever’ strategy works for very few stocks that deliver spectacular growth and just keep going higher. Most stocks, even of well run companies, on the other hand generally come back to same levels after giving a 20-30% move in a few months and may not go up substantially higher even if you hold for years because large and old businesses struggle to grow at a pace that can generate meaningful investor returns.
- Buying penny stocks is unlikely to give you multibaggers.
- A stock that has gone up 10X in past 10 yrs is more likely to go up another 10X in next 10 yrs than a stock that is down 90% in past 10 yrs.
Update on the markets- The Nifty is now at almost 8000, which makes a 1100 point upmove from the Feb lows. The economy looks strongest in several years. Stocks look good on charts. Momentum is now picking up. I see a few exerts now on TV channels who are again talking of all time highs by early next year.To conclude, nothing significant has happened in last one month to change my view regarding the approximate technical target of 11000 for the Nifty in 2017.