Lesson 15 – Investing Action Plan
In this lesson I will leave you with an investing action plan that you can use to start your investing journey.
The one thing I do not want you to do is rush to open a demat and trading account with a broker.
If you are looking at the stock market for the first time you need to exercise caution.
If you already have demat and trading accounts, please hold your horses.
If you have been “trading” earlier and not “investing” you need caution too. Investing requires a different mindset.
I want you to read a few books before you do anything else.
- Intelligent Investor – Benjamin Graham
- One up on Wall Street – Peter Lynch
- Common Stocks and Uncommon Profits – Phil Fisher
Reading these will take around 2-3 months if you have a busy schedule. I don’t mind as long as you read these books properly.
They are simply great books!
Go deeper in understanding businesses
At the very least you should know the business behind a stock.
Start visiting company websites. Learn about the business. Forget the price of the stock for a while.
If the business is consumer facing, you can visit shops and ask questions to gauge brand strength, competition, trends and pricing.
Ask people around you (consumers of products or services) their opinions. Understand consumer behaviour when you can. Start noticing information around you. A hoarding tells you about product launches and business activity. A visit to the department store or a hardware store can teach you a lot. These are a few examples. I am sure you will do a good job and creatively source information.
If the business is not consumer facing (B2B) you have a slightly tougher job because there are lesser sources of information to check.
Yet, it is not impossible. Start going through your contact list of friends, relatives and colleagues. You might find there are people who have knowledge of a particular business area which is invaluable and otherwise hard to find with a Google search.
Start reading annual reports of companies. They are freely available. Pay particular attention to Management Discussion & Analysis section in the annual report. In some annual reports the management talks at length about the industry sector they operate in and its dynamics.
Look at past annual reports too. Check what the management promised to do and whether they delivered on these promises.
You can get your hands on brokerage reports. Please only look at the facts they give you. Do not look at the valuation section in a brokerage report.
Initially, your focus is to understand businesses.
This is an activity that is core to becoming a good long-term investor. You will see it is an enjoyable activity. Give it some time. Soon, you will get a grip on different industry sectors and the factors that drive them.
Get better at understanding accounting
You need to understand the language of accounting if you want to understand the financial profile of a company.
If you want to do a systematic study, I recommend the following book. It was useful to me in my MBA course.
- Financial Management – I.M. Pandey
Read this after you have completed reading the first three books.
Connect business and accounting knowledge with the market
For any stock that you study, start looking at valuation only if you like the business.
Once you find that the business is great, consider where the stock is in terms of valuations. Nothing beats buying a great business at cheap stock valuations. Plain and simple.
I have mentioned earlier that a good business does not necessarily mean a good stock. It is dangerous to overpay in general.
In most businesses which lack stability and growth, you stand to lose money if you overpay. Specifically, in the case of very high quality businesses you might still be safe over the long-term (7-10 years).
At the other end of the spectrum, some stock might look dirt-cheap. But it indeed might be”dirt”. Don’t overdo the “cheap valuation” part.
When it comes to timing, there are few people who can time the tops and bottoms of a market and stocks. Averaging into a stock helps. Selling gradually out of a stock as it becomes overpriced might be useful for you.
How much time will it take before I actually invest?
You will require 2-3 months to read through the first three books if you have a busy schedule like I mentioned.
After that spend a few months reading annual reports of companies. In parallel to this exercise, I recommend reading the next two books.
6-8 months from today, you should be in a position where you will roughly understand the various items in an annual report.
Spend the next few months connecting the business analysis and valuations for interesting stocks. Initially, it might make more sense to look at companies with large market capitalization. With respect to the Indian stock market, that means any stock above Rs. 3000-5000 crore market capitalization. Remember there is no scientific definition of a mid cap and a small cap. These are thumb rules.
There is money to be made in small and mid caps. But they generally carry higher risk.
I would say that a year from now, you can start deploying money into the market.
Slow and steady
You will need to calculate the amount of money you want to allocate to direct stock investing. This should be money that you do not need for at least 4-5 years conservatively.
A wise move will be to invest this money in stocks, the way one does a Systematic Investment Plan (SIP) in a mutual fund. Take a time period of 18 months to 24 months.
Invest with a margin of safety at attractive valuations.
Role of Skill and Luck in Success
Recently, there was an interesting article that I read about skill vs. luck. The premise being that one must differentiate the impact of skill and luck respectively on outcomes. One must judge someone on the skill and work done.
Luck might play a favourable or an unfavourable role.
We cannot predict luck.
So, in this vein, I wish you all the luck (chance or God’s grace as different people may call it) in your investing journey.
You will surely work hard in the”skill” department, so I will not belittle your work’s contribution to investing success by clubbing it with luck when I wish you luck. Its a philosophical argument but interesting if you think about it.
Now that was a different one you might have never heard before!
Anyway, our E-Course ends here. Thanks for taking the time out. I am happy to have shared my experiences with you.
I hope that you have found these 15 lessons very useful. It does not end here.
You can write to me at firstname.lastname@example.org if you face any problems.
And, most importantly, at any time in the future, do let me know when you come across a great stock. I would love to hear about it!
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