Which equity share to buy?
I am a direct equities guy – and most people reading my blog know that. So it is natural for them to expect that I would give tips on my blog. No, I do not.
That you know by now. Also my tips are completely useless because most of my purchases are dated ‘Forever’ so concepts like ‘profit booking’ may be irrelevant for me. This may not suit most of the readers.
So the easiest thing for me to do is to make mother-hood statements, which are completely accurate and totally useless:
– do proper fundamental analysis before you buy
-invest only in blue-chips. After all good companies are not difficult to find.
– invest in a broad range of industries so that the risk is well spread
– equities are good for the long term
ALL THESE ARE correct, but useless statements 🙂
So people think they should themselves do some “equity research” before they buy some share. Correct completely correct. Only thing is doing equity research is not so simple.
Many people think that doing some arm chair research is enough to buy the shares of a company. Wrong. Completely wrong.
Research starts as an arm chair research, but then extends to:
talking to the company, talking to the employees, talking to vendors, dealers, ex-employees, ex-directors, competitors, …sometimes regulators…and then arriving at your own conclusions.
This is not easy nor inexpensive. I mean if you are investing say Rs. 100,000 in Tata Motors how much of effort can you afford to put? On the other hand if you were investing say a Million US $ – or you are in a position to influence an investment of Rs. 5 crores, you will be able to afford this effort.
Once you speak to such a large set of people, and still want to purchase – the set of companies comes to about 20-40 out of the 9k+ listed companies! You then get an analyst to go into valuation – and try to get the timing right.
Have I gone through this process for each of the shares I hold? Well almost yes. Why almost? because my broker does it for me – and I listen only to his Wealth team which HAS an increase in Networth (vis a vis the index) target. There are other parts of his organisation which has revenue targets – there I turn a blind eye (deaf ear?) to!!
Milind N
For Lay Reader of our Blog with Investible surplus betn Rs 5000 to Rs 50000 ….Diversified Large /Multi/Mid cap makes more sense…He is ready to focuss on ensuring that His Investible surplus Keep comming…
Safal Niveshak
IMHO, and after talking to countless such people (employees, vendors, dealers, ex-employees, ex-directors, competitors, managements), my view is that the problem with talking to all those people is that you will end up with a complex mixture of biases – for each of these guys will give you biased answers (that’s human nature).
A better way will be to do you own analysis of companies (that do businesses you understand), see whether the management is credible (this comes out largely from what they’ve said and how they’ve performed in the past), and understand whether the business will profitably exist for the next few decades. Then do some work on understanding the financials and calculate a range of intrinsic values. Then apply the principle of margin of safety.
Following this, you will end up with lesser work and something that is insured by your own analysis and hard-work. And I believe self-analysis and hard-work pays more for investors than listening to brokers (of course, you are lucky to have found a broker who’s worried about you, but 95% of small investors aren’t).
So it’s important to do the hard work if one wants success as an investor (of course, allocating some money to low-cost, well-managed funds is also a great idea).
subra
when i say talking to these people it is AFTER DOING the research, not INSTEAD of doing the research.
Jagbir
If one has to buy 20-30 large caps for the long-term, why not simply buy the Nifty ETF? Can any portfolio beat the Index over a 30 year period?
subra
I do not know whether ‘any’ portfolio can beat the Index over a 30 year period, MINE has. And i think it is because of the poor Index construction AND stupid price controls in India. Oil companies dominate the index and the price at which they can sell oil is controlled. This is the reason why so many of our fund managers beat the index. YES, still I am not sure what will be the result over the next 30 years, but surely over the next 5 years, I will beat the index.
Milind N
I still remember the post “..and till my dividents are more than the rent i pay ,i dont mind staying on rent “…or “…i suggested to buy HDFC.They received HDFC Bank Shares as bonous and the divident ….Recollecting your lines and the learning for us.Many thx subra !
Safal Niveshak
Well, Graham and Buffett were against such research (getting biased views from related parties). Instead, they laid a lot of importance to one’s own conviction and the worldly wisdom one acquires over a course of his lifetime.
This is especially true in the Indian context whether a vendor or competitor is largely unqualified to give you any ‘relevant’ view on the company you are trying to research.
Nir Dhar
Subra,
Your best “tip” of course is http://www.subramoney.com/2011/09/where-to-invest-2/ . Anyone who insists on investing directly in the market as an armchair investor will make serious money if he/she just sticks to the universe suggested in that post. 😉
Regards,
— Nir
pravin
@safal niveshak. regarding buffet,while one’s conviction is fine and dandy,it also helps to have influence with the policy makers.he could afford to advise against silver and WMDs called derivatives while fully indulging in them.he also managed to buy himself a sweet deal (preference shares)in Goldman knowing fully well that the govt was going to bail it out.
i’ve lost respect for buffet post 2008. i’d study his investing thinking before the housing bubble,that whas when he was thinking and executing perfectly
Niveshak
@pravin – of course, mirroring Buffett’s investments or his strategy is foolhardy, but the lessons he and his partner Charlie Munger disseminate with respect to investors using their worldly wisdom while investing has stood the test of time. I don’t follow all of Buffett’s ideas, but definitely follow the ones that have been proven right for ages, and that relate to the need to use both sides of the brain!
As for the use of derivatives, Buffett has used them for the purpose of hedging his positions (and which is fine given the high stakes involved in his financial transactions). But his advice against them is for people who speculate, and look to derivatives to earn a quick buck.
Paramjit
So safal niveshak you think WB is a fund manager – i think Subramoney site itself says WB is a businessman and not a FM. WB buys 100% of a company, turns it around and then takes it public again. Such tactics are not available for a FM. BG on the other hand was a FM at a time when public info available was scarce and BONDS were valued much more THAN EQUITIES – because of the CERTAINTY of cash flows. No way how BG could have valued the service sector, MS, Google or FB.
Comparing Subra to WB and BG is a big feather in Subra’s cap – but I do not think he will get carried away 🙂
Safaak Niveshak
@ Paramjit – No, even I consider Buffett a businessman…but then, as they say, investing is most intelligent when it is most businesslike.
And by the way, I did not compare Subra to WB and BG…simply because I don’t know much about him to draw any comparison 🙂
subra
I am happy being what I am. Fisher, Templeton, Graham, Buffet – are all good investment experts, but the cirucmstances are so different in India! I am happy with my performance in the market. Period. My view has always been ‘these are my views’ – and I do not care what you do with it. Comparing me to anybody? be my guest.
Dr Mohammed Ali Khan
@Safal Niveshak
Your comments are clear, well thought out, no-nonsense & logical.
I enjoyed reading them very much.
Do you have any blog on this topic where I an read more of your writing?
subra
Nir Dhar – NO not true at all. What has worked for me in the past 30 years MAY or May not work for others over the next 5, 10 or 30 years. The skill for the next gen of investors is to be careful – and stay away from jerks masquerading as financial and wealth advisers. Just too many of them in the real world and in the E-world.
Milind N
Subra..time to visit “NO EDIT “Policy ?
subra
yes Milind N…LOL.Completely agree. Have a list of commentators who have to be either spammed or jammed. Hope they get the hint and go away.
When I say I do not care a …..I mean it. One of the main reasons why I choose even my clients.
Rajeev
Subra
I buy direct stocks for the joy of ownership and invest larger portion in equity mutual funds. It is easier to go via MF route as you do not mhave to do the research yourself.
When selecting direct equity, I buy only those companies whose business I can understand. Being an engineer, this normaly means mechanical / software related companies. Whenever I bought stocks on news / magazines tips, it has bombed. So now I stick to my own research.
Regards
M S PANJWANI
Google Search tells me that- “there are 60 million blogs in the world”.
If one blog thinks that someone is uninvited or unwelcome should take hint and go away or else they will be jammed or spammed.
I do take a hint and leave, it will give me an opportunity to visit rest of many million blogs.
One of my friend paramjit used the word “Boswell” he was applauded and acknowledged. I used word Chamcha. Boswell’giri or Chamcha’giri i think the meaning is same. Such a irony that one is applauded and other is shown the door.