Have you ever come across a situation where just after you have invested all your money in a stock it started going down?
Well, of course you have. How many people on earth are lucky enough to see their investments soaring immediately after investing?
Let me tell you my story. I started trading from 2005. In 2008 when the subprime crisis happened, I took a personal loan of 1 lakh and turned it into 2.25 lakhs in 3 months. After reaching this height the market stopped trending lower and started fluctuating both ways every day. As a result of this I lost 25000/- and stopped trading. I still have doubled my money.
However, by 2010 I found that some of the blue chips which I have traded on the downside in 2008 have gone up by more than 100%. If I deduct the amount of brokerage and short-term capital gains taxes from the profit of 1 lakh in 2008, my returns will be a lot less than what I could have made if I would have simply bought and hold the stocks till 2010. Here I am not even considering the time, energy and stress that I have lost every single day. My today’s article about stocks to invest today is not really a stock recommendation where I tell you which stock you should buy today. It is to tell you what different I am doing in 2020 recession from 2008 recession to build wealth from stocks.
Today I have decided to do what I did not do in 2008, buy and hold blue chips which are trading at attractive valuations. Now the problem that all of us face quite often is that immediately after buying the stock price falls. Now since I do not have a lot of money, I cannot buy many stocks and keep on averaging on the downside every time the price falls. That is why I had to think of a way of discovering the right stock and identifying the best price. I would like to assure you that you do not have to be a CA or MBA or have any big finance degree to do this. As long as you understand the basics and have read a few books you are good to go. Let me tell you how I am selecting stocks these days.
I watch CNBC TV18, check websites like moneycontrol.com, ET news etc. I read news papers like Economic Times and magazines like Dalal Street. This is where I pick up my initial ideas from.
Here I do a bit of fundamental checks, where I look at the ROE (preferably > 20%), Debt/equity ratio (preferably 0), and economic moat or competitive advantage. I also like to have a company with reputed management.
ROE = (Net Income/Average shareholder’s equity) x 100
- Return on equity (ROE) measures how effectively management is using a company’s assets to create profits.
- Whether an ROE is considered satisfactory will depend on what is normal for the industry or company peers.
Debt/Equity ratio = Total Liability/Total Shareholder’s equity
- This ratio is used to evaluate how much leverage a company is using.
- Higher leverage ratios tend to indicate a company or stock with higher risk to shareholders.
- Investors of consider long term debt only for calculating this ratio as risks for long term debt is different from the short-term payables of the company.
Economic Moat = Competitive advantage
- Investment decisions should not be based solely on numbers.
- To gain economic moat a company must offer products or services better than its competitors.
- Have a unique product or service.
Other than doing all these I also check if my company is a part of the top performing mutual fund’s top portfolio holdings.
Here I do my technical analysis on charts. This part is very crucial and plays the most important role in deciding the entry point. If this is correct then chances of stock price going down significantly after buying gets substantially nullified.
As of now I am using the following:
- Volume candles.
- Ichimoku cloud indicator.
With the help of the 3 tools mentioned above I will check both the Nifty and the movement of my chosen stock.
In my “Stocks to invest today” list I have selected Reliance Industries.
This is a well-managed company. With Jio in full swing, especially where we are looking at work from home growing in the coming days, this in my personal “stock to invest today” watchlist. I am not mentioning Reliance because it is a stock recommendation. I just want to show you how I selected this stock, so that you can choose your preferred stock the same way.
I got to know about Reliance from the media.
Management as I mentioned earlier is good and have a progressive outlook. Reliance Jio has economic moat. The company has good financials. Although there is some debt on the books, I am hopeful that this will be reduced substantially with the steps the company is taking. Do not worry about fundamental analysis. You will get all this information in Moneycontrol.com website.
The third element in the funnel is technical analysis as you see in the picture. Here I will take a top down approach where first I will look at the charts of Nifty and then check Reliance Industries vis-à-vis the same.
As you can see in all the monthly, weekly and daily time frames Nifty has a negative bias.
Reliance has a positive bias in the long run but it will come down or consolidate in the coming days. Therefore, I do not really have a stock to invest today but will wait before investing.
I do not mind losing a part of the profit, but I want to avoid a situation where after investment the stock price falls. This I will ensure as much as possible.
Points to remember:
Equity investment is the most convenient way of long-term wealth creation.
Always maintain a stock selection funnel.
You can get the data of fundamental analysis from websites like Moneycontrol.com, Mint, your broker’s website etc.
Select stocks with a top down approach. First see Nifty movement, then check the sector/industry movement and finally the movement of the stock you want to select.
Do the chart check on monthly, weekly and daily time frame. When all these are showing an uptrend then buy.
Most important – Do not try to force a buy or a sell scenario while looking at charts. If it is a buy it should be very apparent. Do not try logical conclusion by adding various components of the chart. A good buy or sell should be visible even to a layman.
If you cannot decide whether to buy now, then stay away. Do not blame yourself if later the stock price goes up. Just remember it is your hard-earned money. Investing without being sure is a gamble. Don’t do it. Protect your capital. There are other stocks to invest.