This article is a part of the series of articles “Selecting Top Stocks to Buy“.
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 Picker?
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 mandatory to be a Good Stock Picker?
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.
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.
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