Things to Keep in Mind while Stock Picking

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Any form of ‘picking’ requires a vigilant eye for the best piece and a bit of farsightedness to be confident of the picked-up thing to be of greater value. Same is the case with stock picking, it requires a vigilant eye, a range of predictable performance and most importantly, alignment with life goals. While some stock which may be high performers today actually fall heads-on in some time and some which are going through a low cycle take back their hold being the most flourishing businesses. To be able to make judgments on these bases, you need to have an eye on the market trends, the purchasing power of people, current inclination of buyers and business sentiments. A lot of factors play a major role in deciding the flow of the market and setting the walk it walks.

Stock selection plays a predominant role in deciding how your portfolio is going to perform over the due course and will help you estimate the level of wealth it will be able to generate for you. Here are 4 stock-picking key points you must consider before investing;

  1. Do not quote or follow a precise number

When you invest your money in a business or a mutual fund like –HDFC Mutual Fund, you expect a percentage of returns from its profits. Generally, people have a range of returns which expect like 10-15% or so but when it comes to picking a stock, investors fix a number as the market price of that stock and wait for it to fall till that level.

This may however sometimes work as a jackpot but in most cases does not even come close and people lose their best chance to invest in the business of their choice waiting for the right number.

Rather than a precise number, you must keep in mind a range of market price and then patiently wait for the markets to offer a price within that range. If you are lucky enough, the market may fall even below your set range and allows you to buy more stocks, and if it does not, you would have already prepared for investment amount required to invest within the decided range.

  1. Do not map all stocks on the same scale

Not all businesses are the same, neither are the profits made from them. it can be highly misleading if you map all your investments and returns from them on the same scale. There are businesses which earn lesser profits but are totally maintenance-free and there are businesses which earn highly but require you inputs at regular intervals.

You must consider all the inflows and outflows of money with different businesses you are invested and pick the stocks accordingly. Also, one thing you must know about the business and its dividend policy is predictability of cash flow.

  1. Avoid businesses which bank on being cheap

No business which runs cheap or is a low-maintenance one markets itself as one. Only the ones which require consistent inflow of money and are very expensive to be managed endorse themselves are cheap businesses. There may be multiple reasons to such businesses flourishing in the market and value-trapping investors for the sake of being existent.

These businesses may apparently seem affordable but are running low because of a lot of reasons like:

  • Low competition in the industry

  • High or bullish cycle for the business

  • Poor asset allocation by management

  • Transparency issues

A falling stock price is generally considered to be a sign of degenerating principals of investing and incompetence to work by the fundamentals it was supposed to follow. What is seemingly cheap today may be progressing towards a downfall if the markets oppose it.

  1. A high number is not always bad especially a high P/E stock

While most equity investors are biased towards investing in a low P/E stock, this may not come out to be true at all times. When you pick stocks for your investment portfolio, you would definitely look forward to investing in stocks which have been high performers, have had high pay-outs and most importantly their stocks are priced way less than others. In this league, we generally tend to miss out stocks which have high P/E ratio looking at only one aspect of high stock prices. In the long run, a high P/E stock may outperform the other one by as the lower P/E stock company would grow at a slower rate. A high P/E ensures long-term benefits and extended dividend pay-outs as compared to slower businesses.

While you pick stocks for your investment portfolio, do not fall prey to the biases that rule human behavior, especially the investment behavior. Be vigilant of your surrounding market and buyer trends and evaluate businesses accordingly.

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