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An investor's 3 best friends

Mar 29, 2011

Operating in the Indian stock market since over a decade, we have had the opportunity to study various trading strategies. One strategy which tends to stand out is trading on the tip of a "friend". Now we don't have anything against listening to friends provided they give sound and logical advice. However, we have observed that in 9 cases out of 10, listening to friends is a sure shot way of losing one's hard earned money. So we have decided to introduce you to our friends. These friends of ours have helped us advise our subscribers how to make money and hope they can help you too.

Annual reports: This is the most important tool for an investor. The annual report is a comprehensive report of a company's activity over the course of the year. It contains details of the company's profit and loss account, balance sheet and cash flow statement. The annual report also contains discussion of the company's performance by the management as well as future plans for the business. One should take care to study the notes to accounts section to properly understand the company's financial reporting. But studying just the latest report for a company is a pitfall one must avoid. It is advisable to study not only the previous 3-5 year history of a company but also of its major competitors to gain a perspective of the industry a company operates in.

Websites: An often neglected source of information about a company is the company's own website. A company's website gives information on the company's history, its key personnel, products and various financial information and media reports which are helpful for investors. A company's website provides comprehensive information on the company at one place. This can help an investor understand the company better.

Local knowledge: Peter Lynch, one of the great investment gurus found many of his investments when not in office. He found them when he was out driving with his family or making a purchase at the mall. His advice to investors was "Invest in what you know". This is because he believed that an individual investor is more capable of making money from stocks than a fund manager. The reason behind this is that an individual investor can spot good investments in their day-to-day lives before Wall Street analysts can.

This view was further vindicated by Warren Buffett when he stated that there are all kinds of businesses that Charlie Munger and he don't understand. But that doesn't cause them to stay up at night. Instead they just go on to the next one, and that's what the individual investor should do.

What they mean is that one should know what one invests in. Investing in the stock market is just like putting one's money in a business. And like one knows about the business one invests in, one must also know about the business of the company whose stocks one buys.


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