Pick the Best Stock for Profit

The most important aspects before picking up the stocks will decide on the factor of investor’s catagorories:

• Aggressive
• Conservative
• Disciplined
• Absolute

Let us analysis the list by category wise:

• Investing in stocks that nobody else is buying categorizes you as an aggressive investor
• While staying away from momentum investing shows that you are conservative
• Disciplined investors always follow a stock-specific approach and invest systemically and at the right time when the market is down.
• The last category of investors always looks for absolute returns over a period of three to five years, irrespective of the markets.

After you have defined out your category, now we can understand the strategy for stock picking.

The biggest mistake investors make is to invest directly in the stock market. They buy individual stocks of which they have very little or no knowledge. On most occasions, it appears that no serious thought has gone into their investment. Retail investors tend to depend on tips or suggestions from others and assume the other person has evaluated that stock, which is often not the case. The investors who do not have the knowledge to buy stocks leave it to the experts and invest in the market via a mutual fund.

Within each stock, we can broadly look at three parameters: Business, Management and the valuation

We can't measure all the sectors and companies on the same valuation strip. Use a number of tools like Discounted Cash Flow, Price Equity ratio, Price to Book ratio, and a host of others.

The businesses we are buying today for our mid-cap fund are all potentially large companies of tomorrow. We have a single hypothesis when we buy mid-cap stocks; we believe the business opportunity and the management capability have to be so huge that it can eventually become a large-cap.

But this does not mean we should buy every mid-cap with a vision that it will become a large-cap. In fact, today's portfolio could be almost similar to what it was six months ago.

In large-caps, we break up the stocks into sectors, and then rank the stocks in terms of how much gap there is between the share price and the share value.

In Mid-caps also, we will not simply invest in such shares that are performing well just because the overall share market is positive and moving up. Instead we should identify stocks that will become much larger companies because of better opportunities, progress and growth.

Seven important factors in selecting shares :

1. Firstly, we have to identify stocks in the growing industry. These are companies who will always have the right strategies in sectors that will do well in the future.
2. Secondly the selected company should be in a niche business. This throws up companies that operate in a niche area and are the least affected by other competitive players.
3. The third factor to keep in mind while picking up stocks is that the company should be a leader in their own business and have a large capacity in their own sector. When growth happens, these companies will consolidate their position and become large-cap companies. One such company is the courier brand name today, Blue Dart, a leader by far.
4. The fourth oxygen for the stocks that they should be proxies to large-caps, in the sense that they are from the same industry and if they are mid-sized companies, there is a threat of discount in their valuation. The company's fundamentals do not merit the discount.
5. The fifth and final important factor is picking globally competitive mid-cap companies, which are doing big things outside India. Since these companies are looking at a wider canvas than India, there is a prospect that as they become more successful in their strategy, they can become much larger corporations. In any company, there are three to four critical variables that can make or mar its valuation. And, once you have identified these, a more than half the work is done.
6. Sixth, don't ever try to time the market. However brilliant or seasoned an investor you are, everyone gets fooled sometime.
7. The Seventh point is that in this current Bull Run, people are blend by the market returns. But investors must always balance their investments and never put all their money in one asset class only.

Some Important factors while picking stock
The higher the dividend yield, the better

• Check Valuations
• View prices over time
• View promoter's stake
• Knowledge of the promoter

Caution for picking up stocks:

• Don't just randomly invest. List down a few stocks you like but are not investing in right now because they are being quoted at a high price. When the rates drop, pick them up. Do it because you really believe in them and are ready to hold on to them for the long term. Whenever you find a dip in the stock market, buy them. Always be prepared to stay in for the long haul.
• Take a look at your portfolio. Do you have any shares you are waiting to sell? Now is the time. If you have some stocks that, in hindsight, you view as junk, sell them even if you are incurring a loss. The best time to get rid of junk shares is during a bull run.
• Don't be ignorant of the risk that the stock market holds. Bull Run or no, stocks are risky investments.
• Don't be greedy and invest in 'hot tips' that 'assure' you of mind-boggling returns
• Don’t panic and sell your shares soon when the stock market falls or the inevitable correction take place. Wait and analyze all the factors involved.
• Be smart and stay disciplined
• Don’t ignore the fact that equity is volatile; this is the nature of equity. But you have to differentiate between volatility and risk.
  Risk means:
• Are we getting into a wrong company?
• Are we getting into companies at wrong valuations?
• Do we have stringent parameters set to ensure we are in the right companies and right managements at the right valuations?
  

The risk comes when you have bought into a wrong company. To take care of that, we have frequent management interactions. We also check on all the stocks we own on a quarterly basis to see if there is any change in the business, its fundamentals or its management and whether that is taken care of in the valuation.
Moreover, if a penny stock is being manipulated, you might find it easy to buy, but when it comes to selling you could experience great difficulty. There would be no buyers and your price would keep getting hammered.
The Mantra for long term Investor consistent success in a stock market, by 'value' not 'price'
Last, but not least, you need to do your homework and must have a certain amount of basic knowledge. But the job of investing is more than that. It refers to the ability to take a risk, intuition, judgment calls, timing and other such factors which cannot be learnt in a classroom or from any text book. That's what makes it an art.

A scientific and artistic skills approach is needed for investing in stocks to get back good amount profit in a smart way

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