Personal Financing 104 - Demystifying equity investing

Equity investing is a lot of common sense. It can make one a multi-bagger, as long as one ensures right time of stock entry and exit.

We shall park our discussion on valuation ratios for the next post.

In the current post, let’s focus our attention on some of the most common things one should look out for while investing in a company. So, we shall try and answer few commonly asked questions and understand few myths associated with equity investing.

1. Assume you have no other information available. Only two fancy company names. Which of the two companies are you more likely to invest in? Denyard international or Maxus Chemicals Ltd.?

Most people will answer the first one as their choice. The name looks fancy.The business they operate in should be equally fancy.

But, sadly, in equity market, boring is better! Maxus Chemicals may be in the business of selling a daily use chemical and will continue to do so. It may never die. And as more and more people go ahead and buy it, Boom! By the time others realize its value, it would have already turned a tenbagger for you!

2. An inside trader you know is suddenly selling his shares in the company. Should you go ahead and follow his league?

No!

He may be selling shares due to ‘n’ number of reasons. He may be leaving the company, he may have kids tuition fees to pay for, so on and so forth. It clearly doesn’t mean that the company may be not headed towards a bright future. But let’s say, what if, he goes ahead and buys more shares. Should you follow his league now?

Yes!

He is buying more shares since he knows what lies ahead for him in the future.

3. Let’s say you bought a share of a company at $50. It is trading at $40 now. What should be your call? Short sell?

Well nobody can predict what may happen to a share in the short term. In the long term, based on fundamentals, one can surely take a call. But short term predictability is nobody’s game, not even Warren Buffet. Few short term calls can happen depending on events like new product, quarter results announcement etc. But majorly, No!

So, what to do in cases where the current price of your stock is way low than the buying price?

As long as the fundamentals are in place, HOLD! Price of a stock can vary upto 50% in a year. So, on an average, for majority of stocks, if you bought it at $50, it’s price could vary between $40 and $60 without it raising an alarm for you.

4. A company’s stock price dropped to the lowest. And there is nothing better than buying a stock at its low. It can even make you a 100-bagger. So, let’s go ahead?

Stop!

If stock price went low since the industry was cyclical, go ahead and buy it!

If stock price went low because of a scam unfolded, better not to invest. When news about Cafe Coffee Day spread, its stock price went down like crazy! Should you have bought it then? Check out the fundamentals.

5. Market is going up. XYZ and ABC banks are going up and MNO corporation is going down. Which one should you invest in?

If the market is going up and you want to enjoy short term gains, invest in companies which are going in the same direction as the market. The one going down may not be predictable. So, better to stay away!

In the next post, we shall try and wrap up valuation ratios and further study fundamental analysis through examples from real life.

In case you have more questions pertaining to equity investing, you may send them at kumar.nidhi90@gmail.com.

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