A Beginner's Guide To Evaluating Companies & Buying Stock
Disclaimer 1: Buy based on your own research and due diligence, not the companies mentioned here (if any). I am not a qualified professional in this regard or certified financial advisor. This is merely a sum of my own limited learnings, experiences and resources studied through 4 years of financial curiosity.
Disclaimer 2: This guide will be a work in progress and will keep evolving with time. Whenever I learn or unlearn something new, i will try to infuse it into this larger framework.
Something to reflect on before we begin,
Money is a tool. Nothing more. Nothing less. It exists to work for you; to help you get the life you want. Force it to serve you. Do not serve it.
Capital is literally a seed; learn how to plant it to produce the best harvest. When you do this, you will rule your finances, not the other way around. You either employ your money, putting it to work for you, or you work for your money, selling your time (hours of your life, quite literally) for what you need that week.
Okay, let's begin.
There are 6500 publicly listed companies on the stock exchanges in India.
Of those, most are junk. The goal is to narrow down high quality, moat-y companies that fall into your circle of competence, screen through those with a ton of research and buy when convinced.
I use a couple of basic tools to organize the madness:
ICICI Direct - brokerage is 0.0063*turnover on average
Zerodha - brokerage is 0.0023*turnover on average
Screener - to filter through companies that may not otherwise be on your radar
Google Alerts - for each company that is on your radar. A daily pan-media update on what's going on is pretty sweet
There are 4 fundamental pillars for stock selection:
Each pillar evaluation needs its own strategy and approach. And it pays dividends (intellectual and financial) to do it yourself. In fact--and this is just my personal opinion--giving money to a money manager is to pay someone for learning on your behalf. If someone’s telling you to buy a stock, its because you’re either paying them and continued payment depends on their earning you above market yield and you being satisfied with their services; or they’re invested in it and have a vested interested in getting more people to buy it and drive it up. So do it yourself, because you can.
Along with qualification on these 4 pillars, there are a couple of themes that help to build a narrative for a stock around:
Debt reduction/restructuring play
Sectoral proxy plays
Multiple price triggers
R&D Conversion play
Government policy and Budget focus driven play
On top of this, companies that have strong economic moats & barriers to entry, and reinvest profits back into their moats are goldmines waiting to be tapped, or in Pat Dorsey's words below "the equivalent of catching lightning in a jar":
High Quality Resources I think Make for Valuable Studying:
Farnam Street - Shane Parrish
Safal Niveshak - Vishal Khandelwal
Cognitive Biases - Royal Society of Account Planning
Fundoo Professor - Sanjay Bakshi
The Intelligent Investor (haven’t read yet)
Security Analysis (haven’t read yet)
Richest Man in Babylon
Fooled By Randomness
When Genius Failed - the story of Long Term Capital Management
Mistakes people have made - Valuepickr forum page on this
Understand what a Pump and Dump is
I'll keep building on this guide. But for now, i'll summarize with a thought that I reflect on often. To buy truly exceptional, wealth creating companies, one must have:
The vision to identify them. The courage to buy them. And the patience to hold them.
Upward and onward. Ka-ching ka-ching.