How to Research Stocks for Investment #SMIseries #2
As promised earlier, I will start off in explaining the list of steps I do when researching a stock for investment.
"The best investment you can make is an investment in yourself.. The more you learn, the more you will earn" - Warren Buffett
As quoted by one of the greatest in the field of successful stock market investment. One must learn as much as he/she can before investing
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| List of Steps |
Reading:
Start to read much more than before
- Mainly PEST news,
- Political
- Economic
- Social
- Technological news which can affect countries, companies & their business impact, investment flows & investor behavior either directly or indirectly.
- Pay attention to the news coming from most developed and large countries, which can have an impact on India in terms of economic activity as well as sectors which could benefit or lose out.
- Critical factors like
- Crude Oil
- US Federal Reserve policies
- Commodity price movements
- Trade decisions
- Currency fluctuations
- Geopolitical stresses
- Foreign policy etc all this have been given more importance considering the globally coupled environment.
- Read reports from
- RBI
- Economic Survey
- Budget Reports
- CSO(Central Statistics Office) on monetary policies
- Economic progress
- IIP
- Inflation data etc to get a feel of sentiment & trends.
- Read brokerage reports to understand their thought process, estimation, expectation, and rationale behind their stock price targets, company prospects etc.
- Track all the quarterly results in detail for many companies, even if you haven’t invested in them currently or don’t expect to invest in them in the near future. Knowledge helps, learn as much as you can from the information coming out of everywhere.
Analyzing:
Takes up quite a bit of time to understand in detail
- Sit down with all the above information you read and start collating the impact of all the news, regulations, policy decisions, collateral damage as well as possible benefits that can happen to the companies you planned to invest on.
- Study the stocks, go through the details of each company’s business activities, geographical presence, financial position, brand image, management etc to understand investment opportunities.
- Try to understand the complete supply chain, raw materials & their costs, suppliers & production capacities, demand-supply cycles, price realizations, end user market size, demand/price elasticity, longevity of the cycles etc.
- Understanding the risk of any business is one of the most important aspects & there are quite a few risks which need be be understood. Risk of
- Cyclical/Seasonal business
- Customer concentration
- Concentration in a single business segment
- Peer Competition
- Employees count
- Supply chain/Raw material etc
- Peer Company comparison - Are most companies in this sector going to be impacted in a similar manner or is it specific to certain companies only? Investing in one or more stocks to take advantage of the situation? How long to stay invested in ‘no so good financial’ type of companies?
Validating:
Validate the information available through various means.
- A simple visit to stores and spending some time will help. Sometimes questions are answered and sometimes not, but continue to follow that process.
- Visit (supermarkets, clothing stores, home appliances shop etc) to check for new product/brand launches, products occupying large & prominent shelf space,
- ask sales people: which products are better, which are selling more, which are out of stock most of the time, people asking for any specific products etc.
- ask billing people: is the business good, do they have EMI options, on the company providing the financing, are many people taking the option etc.
- Sometimes people give out info liberally and sometimes not, but that doesn’t mean you shouldn't try. Ask different people at different times to validate their earlier responses.
- Interact with friends, acquaintances, family friends who are working in those companies (public & private) at various levels of hierarchy & chat with them regularly on the business, prospects, situation, competition, hiring, compensation levels etc. They can help to connect you to their friends who are sales or operational level people, who can help you to understand the state of the operations.
- Spend some time at a building materials (tiles, cement, fittings) dealership and you will know if Kajaria is better or Cera products are moving fast or which company is sacrificing margins (through discounts) for sales volumes.
Following this reading, analyzing & validating (at least to few companies), We can frame an opinion which is 60% closer to the investment decision or a continuation of the decision already taken regarding the investments in a particular company.
All this points are very handy in understanding the current situation of any business.
Remember learning is a continuous process.
That's it for today, will continue to post interesting content related to Stock Investment in future. Cheers
Credits: I would like to take this oppurtunity to Thank Gopal Kavalireddi whom I found in Quora (I admire his answers for Stock Market specific questions, In fact learnt most of the above points only from him) and continue to follow him
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