Friday, April 22, 2016

A 7-Step Guide to Value Investing

If you enjoy the thrill of making some quick profit from the stock market by booking trading profits of Rs 2 or Rs 3 per stock then you will save time and effort by reading no further.

But if you are interested in building wealth over the long-term - which requires a well-planned but patient and boring strategy - then going through the 7-Step guide to Value Investing may be beneficial.

So without further ado, here are the 7 steps (according to Andrew Beattie): 

1. Buy Businesses

When you buy a stock, you are not buying a piece of paper or an entry in a demat account. You are actually buying a 'share' in a company. That means, you should spend some time in researching the company's business and assess whether the 'share' you are buying is at a fair price.

2. Love the Businesses you Buy

If you really want to build wealth, you need to hold 'shares' of good businesses over a long period of time. To be able to do that, you have to build a fundamental 'relationship' with the company by regularly analysing its performance. If performance is improving, buy more. If performance is not up to the mark, book part profits. 

3. Simple is Best

You need to understand how a business generates profits and maintains market share. The simpler the business (like Colgate's toothpaste or Marico's edible oil) the easier it is to understand. The more complex the business (like Biocon's medicines or Persistent System's software) the harder it is to fathom how the business is faring.

4. Look for Owners, not Managers

A good manager can successfully run a not-so-good business. A not-so-good manager can run a good business to the ground. Manager integrity and transparency is paramount. Look for managers who act like owners by having a long-term growth focus and delivering on promises. 

5. When you find a good thing, Buy a Lot

A value investor does not need to buy or sell regularly. He waits patiently for the stock of a good business to be available at a fair price. When an opportunity arrives, he buys the stock by the truckload. While this means 'timing the market' - not recommended for novice investors - concentrated portfolios of fewer stocks in large quantities tend to generate better returns.

6. Measure against your Best Investment

Jumping in at every opportunity is not the trait of a value investor. Quality of business is more important than quantity. That means buying a stock only if the company is better - or at least as good - as the ones you already own. It is your money. Why not buy the best companies?

7. Ignore the Market 99% of the time

Markets fluctuate. They neither go up or down in a straight line. Ignore the daily gyrations. When a market is rising, you don't need to buy. Neither should you sell if the market is falling. Rely on your asset allocation plan instead.

Read Beattie's full article here.

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