Financial wizard India: Stock Market investing for beginners

Sources of information for learning : Stock market for Beginners

Learning is the most important thing in life as well as stock market investing. As money compounds, knowledge as well as compounds over the years.

The below quote by Charlie Munger.

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up & boy does that help, particularly when you have a long run ahead of you”.

1. Books

This is the best source of learning about investing because of the below mention reason. Books are collection of information written down by a writer (in our case an investor) after many years of practice/experience of investing & devoting many hours remembering each & every point from the memory for writing it down.

This will help you in many ways (1) Investing mindset, (2) Investing Strategies, (3) Investing avenues, (4) Learning's about different companies, (5) Setting investing goods, etc.

Books recommendations at the bottom of the blogs.

2. YouTube channels

YouTube channels on the stock market are getting popular but many channels are mostly useless or a complete waste of time. Especially which give targets on a stock because no one knows what will happen in the short term. For Eg:- COVID-19 crash, no one ever thought on 1 Jan 2020 that after 3 months the stock market will crash & then after few months rebound as nothing happened.

But few channels like Finnovationz & Pranjal Kamra in Hindi & Sven Carlin, Cooper Academy in English are worth watching.

3. Annual Reports

Read annual reports will help you understand how business works. Most of the investor makes his mistake of not reading annual reports & just investing blindly in companies

“An important key to investing is to remember that stock is not lottery tickets”.

-Peter Lynch

Also, try to read the competitor’s annual report which will help in comparing the performance of the company. Do read Berkshire Hathaway’s annual report where Warren Buffett explains how he invests in companies.

4. Interview & lectures

Many famous investor & fund managers appear on Business news channels where they talk about their investing philosophies & strategies which would be tremendously helpful for your investing journey. Investor & Businessman’s usually present their presentation to their investors or college student wherein they cover different topic’s which can be helpful as well. For Example - Mohnish Pabrai, PPfas Mutual Fund, Ivey Business school, etc.

5. Blogs

If you are serious about investing & love reading. You can read blogs like Fundoo Professor, Safal Niveshak, GetMoneyRich (GMR), Trade Brains, etc. in India. Sven Carlin which I follow outside India, but there are many interesting blogs one can read.

6. Newspapers

Newspapers are good for staying updated with the market. But for beginners, it can be confusing. Day-to-day news about a company is useless as in a day company can never be formed so getting out of business is also difficult.

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6 Types of stock to avoid : Stock market for beginners

6 Types of stock to avoid : Stock market for beginners.

Peter Lynch is a famous fund manager who managed Magellan Fund at Fidelity Investments who gave 29.2% return over a period of 13 years; his assets under management increased from $18 million to $14 billion at the end of his tenure.

He is also the author of three famous investing books which according to me everyone should read

1. One up on Wall Street.

2. Learn to earn.

3. Betting the street.

Peter lynch was the person who coined the word multi-bagger. He used simple & profound method for picking stocks for his fund.

This quote is my favorite .

It just means that one should try to invert the problem in order to solve it. Inversion may not solve the problem but can make it easy to solve it.

So according to this principle or quote what not to do is as important as what to do.So what to ignore is as important as what to buy.

Types of stock to avoid – by Peter Lynch

1. Hottest stock in hottest industry.

This are the companies which are favorites of the markets whose revenue are growing at astonishing pace like technology stock in USA & finance stock few months back in India. They sale at such an extravagant price that it’s difficult to even rationalize the valuations. Even though they have a good future prospectus ahead on them, still it is difficult for them to achieve their goals as new competition will surely entire which will destroy the profitability of the industry.

Peter lynch says

“Hot stocks can go up fast, usually out of sight of any of the known landmarks of value, but since there’s nothing but hope & thin air to support them, they fall just as quickly”.

Peter Lynch Example: - Philip Morris & Xerox.

Xerox is one of the famous company known for its photocopy machines. Xerox was one of a kind company of 1960 which had a huge growth ahead of it. It was also one of the Nifty 50 companies, which were the 50 hot stock of that time. Phillip Morris a cigarette marker on the other hand, a company operating in a negative growth industry in USA but they were expanding in other countries.

After a period of time Xerox in its photocopy business attracted a huge competition from Japanese companies & other American firms as well; which resulted in a huge fall in earning’s & that translated to share price of the company .But in the case of Phillip Morris very there was a negative growth the stock outperform Xerox many times over.

2. Beware the next something.

This are the company who people or the management itself assume that it will the next big thing. This type of company fall in two ways first they bring down profits of the entire industry & eventually they fail to the present leader. In the book Peter Lynch have discussed about few companies.

In Indian context:-

A. Before the fall of IL&FS there were many small banks who were sort to be the next HDFC bank but when the crises came everybody know what happened, their NPA increased, they had to raise additional funds, etc.

B. When HUL tried to take on Marico in its hair oil business. HUL spend a lot of money as it was a huge MNC but Marico ultimately won & HUL sold its hair oil business to Marico.

3. The whisper stock.

This are the stock tips which people receive via phone calls, SMS, E-mails, etc. Usually brokers do this because their main earning source is brokerage & when you buy and hold they don’t earn money. Sometime you may receive phone calls, asking you to buy a stock which also be a pump and dump scheme.

Peter Lynch explain it as follows

“Often the whisper companies are on the brink of solving the latest national problem: the oil shortage, drug addiction, AIDS. The solutions is either (a) very imaginative, or (b) impressively complicated”.

What is common besides the fact that you lost money on them is that the great story had no substance. That’s the essence of a whisper stock. The stock picker is relieved of the burden of checking earnings & so forth because usually there are no earnings.

Instead of buying this hot stock in a hurry, one can wait until this companies establish themselves in terms of profitability as well as its competitive advantage. For example: - Apple Inc. was once a successful startup but Warren Buffett bought the stake in the company only after when it established its competitive advantage & profitability.

Often IPO (Initial Public Offering) are built to ‘buy now or never’. But in this case there is so little information about the company, its track record. IPO investing is good for traders not for investors as most of the IPO shares goes up like a rocket on the day of listing & in few days later they come down.

4. Avoid Diworsification.

This are the company who wants to expand their business left and right, by using debt, internal cashflows, financial engineering, etc by ignore profitability. They spend a huge amount of money on buying unrelated businesses or assets; which in return creates a loss of net worth over a long period of time. The example of long history of diworsification is Coco-Cola. Over a period of many decades they have bought unrelated business & sold them at a loss.

In the Indian context :- In case of Anil Ambani Group, they tried to diversified in every possible industry & in the end all the business didn’t perform as expected which resulted in huge losses for the whole group.

Peter Lynch explains that many a time’s businesses succeeded due to diversification because of a concept called synergy. ‘“Synergy” is a fancy name for two-plus-equals-five theory of putting together related businesses & making the whole thing work’. For example: - When Mothersonsumi Systems buy same or related auto ancillary business in India & all around the world.

According to him it is better of company just buy-back its own shares incase there is no growth ahead in the existing business. Which will reduce the number of shares over a period of time & increase the per-share earnings.

Diversification

Diworsification

5. Beware the Middlemen.

Middlemen here means a single seller or single buyer of a company. If a company for example is a supplier of auto ancillary & its only customer is a single auto maker it can be dangerous for the company’s future. Same applies in case of single buyer.For example: - When Mothersonsumi System Ltd started it had only one customer than was Maruti Suzuki Ltd, but now they have wide range of clientele.

Peter Lynch “Short of cancellation, the big customer has incredible leverage in extracting price cuts & other concessions that will reduce the supplier’s profits. It’s rare that a great investment could result from such an arrangement”.

6. Beware the stock with the Exciting name.

Many a time’s companies with fancy name go up in terms of share price but in reality the fundamental don’t support it. For example: - When a sector is hot like during the tech bubble the companies with name related to tech went up. In case of India few months back finance was a hot sector where all names with finance or related business went up.

Peter Lynch explains it, as often as a dull name is a good company keeps early buyers away, a flashy name in a mediocre company attracts investors & gives them a false sense of security.

Book recommendations