Getting The Right Perspective Towards Investing

Modified: 03-Jul-20

Every investor has a dream that she should create a portfolio of stocks, which should generate wealth for her. The portfolio should become an alternative source of income for her. The portfolio should support her in the hard work to sustain and improve the financial position of her family, her lifestyle and if possible give her an opportunity to retire early and fulfill all her dreams: travel, adventure and doing things she is passionate about. I have the same dreams and desire that my stock portfolio should generate sufficient income; so that I might not need to work at a job as a necessary means to earn my livelihood. Monitoring my portfolio would be the only thing needed and I do not think of portfolio management as a job. It is my passion, which makes me feel lively and rejuvenated.

Many acclaimed people have already achieved that dream through stock investments, both in India and abroad. The accomplishments of Warren Buffett and Rakesh Jhunjhunwala can be cited as good examples. Warren Buffett buys the stakes and stocks in the companies, in which he would like to, invests through his parent holding company Berkshire Hathaway. Those companies, in which he has invested earn profits and send majority of the cash back to the parent company (Berkshire), which Warren further invests. Warren, currently 84 years of age, enjoys his job so much that he often says that if loving one’s job ensured long life, then he would never die. His personal wealth is about $ 67 billion. I do not know whether my portfolio would ever be able to reach those levels. It is in the time to come, when we will see how far I will be able to go. I believe that anyone who is able to put in the required hard work can do the same.

 

What is needed to be a Good Stock Investor? 

Reading: 

It is the single most important quality required in a person who wants to be a successful stock market investor. Many successful investors like Benjamin Graham, Peter Lynch etc. have written books sharing their knowledge about stock investments. They have explained the stock picking process in a very simplified manner. Reading these books is the first step in this journey of stock investments.

 

Patience & Emotional Control: 

This is another very important quality needed for a good stock market investor. The role of emotions in investments has assumed such significance that a separate field called “Behavioral Finance” has been created for it. Stock market investing requires a long-term approach and you have to stay invested in the market for a long time to reap the benefits. Investors face many emotions during their stay in the stock market. Emotions like fear, greed and frustration make investors take impulsive decisions of entry and exits during short phases of market ups & downs. When stock prices go up, the investors try to make short-term profits and thus sell their investments early. Many times, after investors sell, stock markets keep on rising further and investors are not able to reinvest their money and market runs away from them. Market movements are highly unpredictable. Investors need to stay invested in stocks of good companies for long periods to make significant wealth.

 Jeanne Sahadi, a CNNMoney.com senior columnist writes:

“Missing out on those high-return months (the timing of which you can’t predict) can cost you a lot. A hundred dollars invested from 1926 to 2006 in the S&P 500 would have yielded $307,700, according to Ibbotson. But if you missed the 40 months with the highest returns you would have ended up with – no kidding – $1,823 only.”

When stock prices go down, many investors fail to analyze the reasons of fall in the stock prices. Some investors are gripped with fear. They sell a good company whose stock price had fallen due to general market sentiment and not due to poor performance of the company. They should actually be buying more stocks of that company at cheaper valuations. Other investors show opposite behavior and do not sell a poor performing company despite huge decline in its stock price because they hate to book losses. It is said that one should buy stocks; the way they buy their vegetables & groceries; one should buy more when prices are down.

Therefore, one needs to be in control of one’s emotions and should develop the patience to delay the short-term gratifications. One should be able to visualize the wealth, which markets are able to create over very long periods. Reading about the behavior of successful investors and observing their actions during different phases of stock markets, will help in developing the emotional control required to be a successful investor.

 

What is not needed to be a Good Stock Investor? 

A Degree in Finance: 

Finance & investing are not rocket science. Business families have been able to teach fundamentals of finance to their children within confines of their homes. The same phenomenon of simple conceptual understanding always stands true in finance & investing. You need to get clarity on some basic concepts of finance and you would have gained the foundation to start investing. Good reading habit will help you to build on that foundation.

 

Advanced Mathematics: 

You do not need to be a mathematician to succeed in stock market investing. The math you will need for investing is taught during school education. You do not require more than the ability to carry out the basic calculations. If someone says that, you need advanced mathematics for investing, she is confusing you and you should ignore such advice.

Investing requires a lot of common sense and control of emotions. If you are able to learn basic concepts, are able to read further to build upon the existing knowledge and keep patience & self-control during stock market highs & lows, then you have what it needs to become a successful investor.

 

How to Start Investing?

Once one has read the required books of successful authors, the person will be able to understand the basic framework about stock market functioning. She will also get to know about various characteristics and parameters of stocks to be looked into while doing stock investment. She should note down and keep a list of these parameters with her when analyzing stocks to see how these parameters apply when doing actual stock analysis.

Then she should start exploring stock markets to identify the best stocks for her. Financial newspapers (e.g. Business Standard, Economic Times etc), business magazines (e.g. Business Today), stocks magazines (e.g. Dalal Street, Capital Markets etc) and websites (e.g. Moneycontrol etc.) are good sources to start looking for potential stocks for detailed analysis.

I have read some of the successful investors and have prepared some stock picking guidelines, which have helped me in selecting good stocks over the years. I have prepared these guidelines by reading books and learning from my experiences in stock market investing over last few years. These guidelines keep on getting improvised further as I keep learning new lessons. 

This concludes the first part of a series of articles about the process of Selecting Top Stocks to Buy. Please let me know how you think about stock investing and the process that you follow. 

I will cover the various approaches towards stock market investing in my next post. This series of articles will cover detailed discussion on my stock picking guidelines. I will write about the avenues to search for stocks and to get the required information for analysis. The steps to analyze the gathered information and to make decisions based on such information will be covered in the next parts of this series.

 

Guidelines for investor who are just starting their Investing Journey

Hi Sir, I am a 19 years old investor jumping between technical and fundamental analysis. I have now settled at fundamental analysis as I believe that the stocks are pieces of great businesses, which I cannot own just like a piece of paper to trade back & forth.

I also know that everybody has their own style of investing. Some follow growth investing, others follow value investing. Some are seasoned investors whereas other are just pure speculators.

At this Moment, I truly want to be a long term value + growth investor as time is on my side.

I am determined to be a complete value investor and currently, reading the book “Security Analysis”.

Sir, the only help I want is to get a detailed path for a 19 year old so that I do not make wrong decisions. I want some kind of roadmap towards investing for the rest of my life. I am sorry for the long query.

Related Query:

Dear Sir,

I am new in the field of share market Investment. I have gone through your blogs and found them very useful.

My background:

I am a working professional with little knowledge of finance. I have attended a workshop on technical analysis a few years back but was not able to follow it. My personal goal is to have an alternate source of income apart from the job and to achieve financial independence. Now I wish to know where to start, what are the prerequisites that are required to be followed to be a successful investor.

Please guide me?

Thank you in advance.

Author’s Response:

Hi,

Thanks for writing to us!

We believe that to succeed in equity investing an investor does not need a formal education in finance.

We believe that an investor should initially learn about equity investing from books like The Intelligent Investor by Benjamin Graham and One up on the Wall Street by Peter Lynch.

A few of the articles on our website like the one shared below would also help the investors in understanding stock analysis process:

Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Once an investor has read these resources, then we believe that she should start reading more and more annual reports. We believe that an investor would be much more confident about herself once she has read annual reports of 50 different companies.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Which Books to Read to Learn Investing

Dear Sir,

I am an avid reader of your blog and highly appreciate your simplicity in explaining the things which is essential to common man for understanding the complex nature of finance.

I am interested in understanding the companies’ balance sheets, what are the norms and rule of accounting practices used by them and what actually things mean beneath the surface. I believe merely computing numbers don’t lead to insight, it’s required that I understand the underlying principle and intention behind them.

A lot of areas like employee benefits (insurance, pension obligations etc.) , currency hedging , adjustment entries , capitalization of assets and debt and their deprecation or amortization, related party transactions and understanding consolidated balance still need further deeper understanding to complete the analysis.

Kindly suggest me accounting and finance books that is relevant to Indian companies and Indian laws and is also easy to understand and serves as complete resource for any information and clarification.

This will enable me understand things for clearly and ask relevant questions.

Author’s Response:

Hi,

Thanks for writing to me! It’s pleasing to know that you wish to read more about accounting concepts. It is important as accounting is the language of the business and the proficiency at accounting is definitely an asset for every stock investor.

I believe that for investors who do not have background in finance in terms of formal finance education, they should read books by Benjamin Graham and Peter Lynch:

These books are very intuitive to investors as I could learn a lot about finance and accounting, when I read Benjamin Graham in 2008-09 before I received formal finance education as part of MBA (2009-11).

Further the investor should read the book: Financial Shenanigan by Howard M. Schilit, which is a very good book on understanding accounting juggleries used by smart management to cook their books and present a rosy picture, which things are not as bright.

Read: Investment Books For Beginners

I guess that after reading these 3 books, the investor would be very well verse with the general concepts, which are applicable across markets. As accounting rule within specific markets e.g. India, keep on changing year on year, therefore, it is advised that after reading the above recommended books, the investor should refer internet for further clarity on individual accounting clarification. As the latest articles on the internet would have explanations as per latest accounting rules applicable.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

Related Query: How to start reading for learning stock investing

Hello Vijay sir,

I am presently working as a software engineer. I wanted to learn about investing from 2 years back, but I didn’t know where to start, what courses to take. I tried reading a few books but of no use. A year back while surfing the internet, I came across your articles. That was the starting point and what exactly I wanted to learn and thanks for your articles as well. I have a few questions to ask

Question 1

I want to get in-depth understanding and knowledge of evaluating stocks, more than stock evaluation, how to develop in-depth business analytical thinking. What can you suggest to me based on your experience like where to start?

Question 2

Since I can squeeze 3-4 hrs a day on investing. How do you want me to allocate my time? Reading books or analysing stocks.

Question 3

For reading other than books. What should I read (read more annual reports, research articles, case studies)?

Question 4

At present, I have no idea of valuation. Could you suggest a good book to understand valuation for non-finance backgrounds which is easy to understand?

Question 5

Any other suggestions apart from these to become a better investor. Doing what make us a better investor.

Thanks.

Author’s Response:

Hi,

Thanks for writing to me! I am happy that you found the article useful.

1, 2 &3) 

I advise readers of the website that the learning stock analysis and investing has two aspects: theoretical and practical.

The theoretical aspects gets adequately covered by reading two books:

  1. The Intelligent Investor by Benjamin Graham
  2. One Up on the Wall Street by Peter Lynch

In addition, readers may go through the articles on www.drvijaymalik.com to get the simplified understanding of a lot of concepts.

For the practical aspect, the investor needs to read more and more annual reports and then do the company and stock analysis on her own.

I believe that the above-mentioned books would teach an investor most of the relevant stock analysis concepts and thereafter studying many annual reports would improve her stock analysis skills.

4) 

Valuation is a very subjective concept. I prefer to use P/E as the key criteria and have accordingly explained my thought on the P/E to be paid for any stock in the following article:

3 Principles to Decide the Investable P/E Ratio of Stocks

5) 

If choosing between reading more theoretical books and reading more annual reports, then I would advise investors that after reading the two books mentioned above, the investor should read more annual reports.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr Vijay Malik

Similar Query:

Thanks for the Super Post Vijay,

Why I Left Technical Analysis And Never Returned To It!

Lately, I started reading articles on stock market investing and I came across with this fantastic blog. I am completely newbie in this field and I do not have any background in economics or money management.

I am software engineer. I think that is the reason I could not able to understand Intelligent Investor book (have read only first 50 pages).

I want to know the basics that we have to know to start learning fundamental analysis.

Are there any books which gives complete basic idea about fundamental analysis, so that I can understand when I start reading Intelligent Investor again?

Thank you for your time

Author’s Response:

Thanks for writing to me!

It’s great that you have started reading and learning about investing on your own. I believe that a person does not need to have a background in finance for becoming a successful stock market investor provided he/she is willing to put in the required time and effort for learning about stock analysis.

Intelligent investor is a great book. However, many readers find it bit technical for its use of accounting terms. Nevertheless, it provides one of the most elaborate and detailed description of accounting from the perspective of an amateur stock investor. It is highly recommended that an investor should complete this book.

If you want a book, which is easier to read than Intelligent Investor, then you should read “One Up on the Wall Street” by Peter Lynch.

Both the books, “One up on the Wall Street” and “Intelligent Investor”, are recommended reading for stock investors. Therefore you may read One up on the Wall Street first.

You may read my review about One Up on the Wall Street here:

Book Review – One Up on the Wall Street

You would already be using google to find out more about the accounting terms being discussed in the Intelligent Investor. You should keep doing it.

All the best for your investing journey.

Regards,

 

How to start investing with a full-time job

Hi Sir,

I am currently investing through mutual funds. I would like to invest in stocks with only surplus cash, which I do not need for 10 years. I have full time job.

Is it possible to invest in stocks with full time job in hand? How to start?

Author’s Response:

Hi,

Thanks for your feedback!

I believe that a person does not need to have a background in finance as well as dedicate full day for becoming a successful stock market investor provided he/she is willing to put in the required time (over weekends) and effort for learning about stock analysis.

I suggest that you read all the articles in the series:

Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

After that, you should read books of great investors:

Investment Books For Beginners

Moreover, you should focus on the stock that have good qualities and are suitable for retail investors:

3 Guidelines for Selecting Stocks Ideal for Retail Equity Investors

I am sure that once you have read these, you would be very confident about stock market investing.

Nevertheless, if the investor believes that she does not have sufficient time with her that she can dedicate to analysing stocks, then she should outsource her investing to institutions like mutual funds or any other method as per her preference.

Regards,

 

Do we need a large initial capital to generate wealth in stock markets?

Hi Vijay ji, what about capital?

To be more successful should we need more capital? If we consider small capital, days of Rakesh Jhunjhunwala and Warren Buffett are over right?

Author’s Response:

Hi,

Days for hardworking investors are never over. Their days would get over only when the markets would cease to exit

Both Rakesh Jhunjhunwala and Warren Buffett started with small capital and worked hard to make it grow. In the same manner other investors, if work hard, can expect to grow their wealth over the years.

All the best for your investing journey!

Regards,

 

Basic Terms related to Stock Markets and Shareholding

  1. Different categories of stocks, based on Market cap
  2. Terms such as Upper circuit, lower circuit and how these are decided and where one should see for them
  3. Volumes of shares exchanged and how to make sense of this data
  4. Different categories of Market cap and limitations set by market regulators for thinly traded stocks
  5. How to disclose only partial buy quantity so as to not increase share price

Author’s Response:

Dear,

Thanks for writing to me!

1) Different categories of stocks, based on Market cap:

They are usually classified as large cap, mid cap, small cap. Different sources decide different threshold for classifying stocks in to these categories.

2) Terms such as Upper circuit, lower circuit and how these are decided and where one should see for them:

They are maximum amount of up move or down move that the exchange would permit before it stops the trading in a particular stock or market. An investor can find the criteria about deciding the circuit filters at the exchange websites: BSE and NSE for Indian markets

3) Volumes of shares exchanged and how to make sense of this data

For fundamental investors, volume of shares is essential to decide about the liquidity of a stock before investing. For technical analysts, the volume data is used in calculation of many indicators, which are used to decide the buying/selling triggers. At www.drvijaymalik.com we follow fundamental analysis and do not use technical analysis for our investment decisions.

You may read more about our thoughts on fundamental analysis vs. technical analysis in the following article:

Why I Left Technical Analysis And Never Returned To It!

4) Different categories of Market cap and limitations set by market regulators for thinly traded stocks:

Same as per point 1 above. Market regulators like SEBI as well as stock exchanges, which also have quasi regulatory functions, they stipulate different rule for trading and delivery of thinly traded stocks to avoid manipulation of stock prices of such stocks so that retail investors do not get stuck in such stock, which are many a times stock operators driven. Such restrictions include rules like compulsory delivery of some stocks. An investor may learn more about such restrictions on the websites of SEBI and stock exchanges (NSE, BSE).

5) How to disclose only partial buy quantity so as to not increase share price

Disclosing partial buy quantity is a feature offered by many stock brokers to their investors. Many brokers offer options to disclose minimum quantities like 10% of the total order quantity or 1000 stocks, whichever is lower.

An investor may get to know more about such facilities/features offered by their brokers at their respective website.

There is a lot of literature available on the internet about the points discussed above. You may read other articles available online to learn more about these concepts. If you need any further specific clarifications about the doubts which you have after reading those articles available on internet, then feel free to write to us.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

Related Query: Basic Terms related to Company Shareholding

Hello Vijay

I saw this recently in a forum

1) Total Public shareholding:

  • A) No of shareholders — xxx
  • B) Total no of shares held by public– yyyy
  • C) Total number of de-materialized shares available — xxx

My query:

  1. What is the meaning of 1, A, B, C?
  2. Where can we get this data?
  3. Can a listed company, be part private and part public to avoid hostile takeover?

Author’s Response:

Dear,

Thanks for writing to me!

1) Total public shareholding: it is self-explanatory. It indicates the % of shares held by general public (i.e. people other than promoters)

Author’s Response: Number of shareholders: it is self-explanatory

B: Total number of shares held by public: means the number of shares which constitute the total public shareholding in (1) above

C: Total number of De-materialized shares available: the number of shares which are not held as physical certificates and can be electronically transferred.

2) We can get this data from the annual report and the quarterly shareholding disclosures filed by the company to the stock exchanges

Read: Understanding the Annual Report Of A Company

3) A company cannot be part private & part public. However, there are certain shares (like the shares held by promoters), which are not available for others to buy as promoters do not sell these shares easily.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

P.S.

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