7 investment mantras for stock picking

The raging bull market is a self-proclamation of the investment potential of stocks. It is therefore natural to want to participate in actions. However, with recent buoyancy, it can become very difficult to sift wheat from the chaff. To help you navigate it, here are 7 mantras for selecting actions-

Recognize your investment goals: Before you start stock picking, you need to assess your investment goals. It might sound a bit offbeat and not directly related to selecting a strong equity portfolio. However, a thorough understanding of what you want to accomplish can dictate which businesses you want to buy. Some are interested in wealth creation; others may prioritize stable income through dividends.

Invest in businesses you understand: When you buy shares, you become part owner of the company. Understanding the elements that constitute the heart of the business will be advantageous in estimating its future potential, or the likely pitfalls. In-depth knowledge of a business is not just a superficial understanding of its products and familiarity with its direct competitors. Understanding also means knowing how much cash it can generate, estimating its intrinsic value and betting on its estimated future potential. On the other hand, avoid companies whose business you don’t understand.

Quality management is the key: Competent and experienced management plays a crucial role in determining the fortunes of a company. Many investors tend to overlook this aspect of a stock, but often it’s just these simple things that have a huge impact on its trajectory. Integrity and capacity are the two key factors that determine the quality of a leadership. If you find red flags in terms of management conduct, this is a sure indicator of rejection of the stock, even if it checks all other qualitative factors.

Focus on the competitive advantage or the gap: A competitive gap or advantage allows a business to beat the competition and generate consistent cash flow in the future. A strong gap is a credible signal of good earnings over a long period of time.

Concrete result: While the oft-repeated axiom asserts that “past results are no guarantee of future performance,” a business with a good track record is less likely to go astray in the future. Historical performance also reveals a lot about the financial health of a business and how it has handled unexpected events in the past.

To diversify: When selecting stocks, you should make sure that your holdings are not concentrated in one or two sectors or companies following the same economic cycle. Spreading your capital across a variety of industries will protect you from the backlash of a sudden disruption or a protracted financial downturn relegated to specific industries.

Think long term and find your safety margin: This mantra sounds very simple, but it is not easy to accomplish. It is easier to invest in a stock than to hold the stock through its volatile trajectory. The path to achieving your investment goal is not necessarily linear and more often than not requires you to shut yourself off from the noise of the market and hold onto your conviction, even if it makes you sound overly unconventional. Whatever strategy you take, things may not go as planned. When you have a process that requires a good safety margin, it ensures that your plan has a very high probability of success and that the outcome will be both favorable and rewarding.

Mrinal Singh is the CIO and CEO of InCred AMC

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