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Sunday, March 22, 2009

How to pick Stocks for Investment - Part I

Which are good stocks to pick for my investment portfolio? How do I go about picking such stocks? Can you please share your 'buy list'? Is this a good time for stock picking?

These are some of the questions I face most often from friends, relatives and investors. The fact that many are still asking such questions is an indication that the bear market hasn't reached its bottom yet.;-)

Some of the business TV channels ring a bell when the stock market closes trading for the day. No bell ringing can announce the end of a bull or bear market. One has to look for certain human behavioural indications.

Near the peak of a bull market, all conversation - whether at family gatherings or around the office water cooler - leads to a discussion about the stock market, and who has made a killing on which stock. The newspaper headlines scream "Sensex crosses 20000" in huge bold fonts. Business channel hosts 'celebrate' every 1000 point Sensex rise wearing beaming smiles and funny coloured plastic hats.

When the bear market meanders down towards its bottom, the newspaper headlines go back to reporting political or sports news. Business TV hosts have glum looks and talk in hushed monotones. Friends and relatives smile weakly if they catch your eye, and then slide away mumbling about some important business to attend to. 'Shares' becomes a dirty word, not to be uttered in front of children or in public.

So why did I choose to discuss stock picking at this time? It is for the benefit of those investors who have bought stocks by following some one's advice or tips without doing any home work and have not just lost money, but have realised their folly.

Serious investment is akin to running a business. It requires all the due diligence, courage, knowledge and perseverance that are needed to make a success of any business. (For excitement and thrill, there are casinos and race tracks.)

Enough pontification. On to some basic guidelines that I have followed with a reasonable measure of success (that means, with more than a 50% chance of my picks making money).

In a prior post, I had explained how the stock market and the overall economy move in cycles, with the stock market 'leading' the economic cycle by a few months. I had also discussed which sectors come in to prominence at which stage of the cycle.

For example, many investors stuck with overpriced real estate stocks may be thinking that this is a good time to buy the beaten down stocks. The problem is that they will have to wait a really long time - till the next bull market nears maturity - to earn any reasonable profits.

An important criteria for smart investment is to identify at which stage the market and economic cycles are in now. Then short-list the top two or three stocks (by size and reputation) from the corresponding sectors for further analysis.

Just because some sectors tend to dominate others at different stages of the market cycle does not mean an investor should flit in and out of sectors to try and 'time' their profits. Again, consider the real estate example. The sector has been dogged by lack of transparency, accounting shenanigans and dubious managements. Such sectors should be avoided like the plague.

In a post on Dec 14, '08, I had indicated the sectors that I like for long term investment. I had also listed out a number of stocks in such sectors. Interested readers may want to go through that post.

In the next installment of this topic, I will provide some thumb rules on how to narrow down your 'buy list' to the 10 or 12 outstanding stocks that should form your 'core'  investment portfolio.

4 comments:

income.portfolio said...

Subhankar:

"Serious investment is akin to running a business"... that says it all.

If fact I use one simple excel sheet to run my house as a business. It includes the three major financial statements (Balance sheet, PL, Cash flow). Yes, I allocate for depreciation too. I consider my investment portfolios as my products. I have different sub-portfolios (i.e different products).

BTW: Have you ever seen folks discussing that they make a mistake and lost? Atleast in my case, 95% of the time i hear success (and everybody is making money. If that's the case, who is losings?

Good article!

Best Regards,
TIP Guy

Subhankar said...

Appreciate your views, TIP Guy.

In a blog post on Dec 21,'08 ("Learn from my Investment Mistakes") I had discussed about some of my glaring investment mistakes.

income.portfolio said...

Subhankar:

Yes I did read that. My question about mistake was general comment, and not directed for you. My apologies if it came out wrong way..

Subhankar said...

Hi TIP Guy

I wasn't sure if you had read that post, so I directed you towards it. No offence taken because it was clear that none was intended. So no apologies required.

If you read my first two posts (back in June 1 and 17, '08), I've written about how I blundered into the market and the consequences I had to face!