25 Tips on Value Investing in Stock Market
While physicist Sir Isaac Newton is widely viewed as the leading authority on gravity and motion, economist Benjamin Graham, best known for his book The Intelligent Investor, is lauded as a top guru of finance and investment. known as the father of value investing, which is the best book on investing.
The Intelligent Investor: The Definitive Book on Value Investing is considered one of the most important books on the topic. By evaluating companies with surgical precision, Graham excelled at making money in the stock market without taking big risks.
A short summary of the book: The Intelligent Investor by Benjamin Graham
The book teaches readers strategies on how to successfully use value investing in the stock market and the value investment strategy. Historically, the book has been one of the most popular books on investing, and Graham’s legacy remains.
The Intelligent Investor is notable today, with many famous investors praising it for helping them learn how to determine value in the stock market and successfully pick stocks for their portfolios.
We thank our Saarthi at Skillarthi, Abhishek Patodia, VP Carwale, for sharing his insights from the book. He believes, while the book was first published 72 years ago, most of its principles remain valid even today! A special thanks to him for sharing passages from the book that are easy to read.
What is a value investment?
Buying stocks that trade at a large discount to their intrinsic worth is the art of value investing. Value investors accomplish this by searching for businesses with low valuation measures, often low multiples of their income or assets, for longer-term reasons that are not warranted.
Let’s see the tips and value investment strategy for beginners.
#1 Equity: debt ratio should vary between 25:75 to 75:25, depending on your risk appetite. Review the split once every 6 months, rebalance if required.
#2 Diversify your equity portfolio, but not excessively. Do not hold more than 30 stocks.
#3 Invest in relatively unpopular large companies, with good financials and earnings, low P/E ratio based on last or previous year’s earnings.
#4 Don’t buy a stock just because the business is doing well, it doesn’t mean the stock is not overpriced.
#5 Always analyze the company financials before investing in it. Do your homework even for stocks of companies you know well. You are much more likely to miss their weaknesses otherwise.
#6 Invest in bargain stocks which are selling for less than the company’s net working capital (current assets – current liabilities) alone. This means buyer pays nothing for fixed assets and any goodwill.
#7 Consider stocks that have hit a new low for the past year.
#8 Look for the following positives in a company before investing: competitive advantage, brand identity (ex: Harley Davidson), monopoly or near-monopoly, economies of scale, unique intangible asset (ex: Coca-Cola), a resistance to substitution.
#9 Look for consistent revenue growth, 10% growth over a long timeframe is better than 15% or even higher growth for a couple of years.
#10 If a company generates more cash than it consumes, it is a good sign. See whether cash flow from operations has grown steadily throughout the past few years.
#11 A company spending money on research to develop new product lines is a positive, especially if it has shown a similar track record with an impact on revenue in the past.
#12 If a company is dependent on a single large customer or a handful, for most of its revenues, avoid it.
#13 If a company’s senior executives are making big stock sales & diluting repeatedly, that’s not a healthy sign.
#14 Look at ‘Cash from financing activities’. It indicates the company is raising a lot of money, and it’s underlying businesses are not generating enough cash. Avoid buying.
#15 Start reading the financial statements from the last page and move forward. Anything the company doesn’t want you to read is probably buried towards the end. Also read all the footnotes.
#16 Don’t do day trading, it is almost like gambling, you might pay a premium to buy, and end up paying higher brokerage & tax as well.
#17 Buying mutual funds purely on the basis of their past performance is one of the stupidest things an investor can do.
#18 While buying a mutual fund, look at following aspects, in the order mentioned – fund’s expenses, riskiness, manager’s reputation, and finally past performance.
#19 Do SIPs investing the same amount every month.
#20 Buy index funds, over a long period they are likely to give better results than most other options. Index funds have very low operating expenses and trading costs, that’s one of the reasons they do better.
#21 Funds where managers own a big part of the fund’s share tend to do better since manager’s manage it as their own money.
#22 Don’t buy funds with high fees, even if they show high return. High return is temporary, but high fees is not.
#23 Put some money in mutual funds specializing in emerging markets. These markets would not move in tandem with your home country, and hence better diversification.
#24 You should exit from a fund if there’s
– a sharp and unexpected change in strategy, like growth fund buying tons of insurance stocks
– an increase in expenses – large and frequent tax bills
– suddenly erratic returns.
#25 Put a percentage to make crazy investments, not more than 10%. Track this portfolio separate from your main portfolio.
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