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Stock investing: Are you up to it? - Views on News from Equitymaster
 
 
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  • Sep 16, 2004

    Stock investing: Are you up to it?

    Ever wondered how much time and thought you put in taking your equity investment decisions. Before you answer, compare that time with the time you spent on deciding, which colour television/DVD player to buy (or which specialist doctor to consult). If the answer in both cases is the same, may be there is no cause for worry.

    But more likely than not, the amount of time spent in researching your equity decisions is much, much quicker than the aforesaid decisions. This is worrying, as equity related investments are inherently risky and therefore need quality time for active research and cross checking.

    While you may wonder, how you could create even more time for this from your busy schedule, we have tried to simplify the process for you. Though the below mentioned process may not be fool-proof, it can certainly reduce your chances of losing money in the stock market. Here goes:

    Pre-investment checklist:

  • The stock that you are buying: ___________________________________________

  • Write a one line on why you are buying the stock: ________________________________________________________________________ ________________________________________________________________________

    (For example, Hindustan Unilever (HLL) is likely to benefit from higher consumer spending in the next three years. "Never invest in any idea you can't illustrate with a crayon" - Peter Lynch in his well regarded book "Beating the Street")

  • What are your key assumptions?

    Assumptions Risks to assumptions ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

    (Assumption examples: Economy is going faster, interest rates are soft, auto sales are robust, the company will maintain market share and profits will increase. Risks examples: Is there a risk that economy may slowdown or interest rates may rise? Will the company be able to maintain its profitability if the scenario changes? Are your assumptions optimistic, realistic or conservative? This will enable investors to re-look at assumptions from time-to-time)

  • What is your investment horizon for the stock? ________________________________________________________________________


  • What is your return expectation from the stock? ________________________________________________________________________

    (The BSE Sensex has grown at a CAGR of 17% since 1985. The long-term return from the stock market is likely to be in the range of 15%, depending on the risk appetite. Higher the return expectations, higher the risk attached with the same)

  • Have you read the latest annual report to understand the management's outlook? (Yes or No)
    ________________________________________________________________________

    (Factors to look at: Consistency in focus, volatility in earnings (if any), the long-term vision and Promise Vs Performance. Does your outlook and management's outlook match)

  • Have you looked at the recent quarterly results? (Yes or No) ________________________________________________________________________

    (Has anything changed in the last few quarters to warrant a change in the initial assumptions)

  • Are you buying the stock because you are convinced about the growth prospects or because the overall market is positive? ________________________________________________________________________

    (If the overall market is positive about a stock, either everyone knows the story already or there is a sense of optimism and vice versa. "Not all common stocks are equally common - Peter Lynch in "Beating the Street")

  • Are you planning to invest in the stock from your income or from your savings? ________________________________________________________________________

    (If one invests in a stock with a specific time-horizon, it is better to be sure that the sum invested is not required for the specific period to avoid churning and losing out on the upside)

    Post investment checklist:

    After one has bought a stock, periodical review on the investment is as important as the investment itself. It is better to re-look at the assumptions and the risks to assumptions in the event of any news/corporate announcements to realize the full benefit of the investment. More importantly, if the target price is achieved, it is better to exit the stock and not wait for 'further upside'.

    While stock markets are influenced by various internal and external factors, it is upto the investor to take utmost care before making an investment decision. At the end of the day, it is not always prudent to blame the stock market for one's losses.

     

     

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