Identifying Shares That Create or Destroy Wealth

Investing in the stock market is no easy game and it never will be! Indian markets’ fierce recovery post pandemic-led fall attracted many first-time stock market investors.

If past lessons teach us anything, it is that patterns and cycles repeat themselves in the markets. Newbies can avoid entering wrong stocks by learning from others’ experiences. Many beginners entered with high hopes, only to find themselves broke after a few months of faulty stock decisions. That is the harsh reality among most millennials who run behind quick money without exercising caution.

“Sahi Stock Chuno, Dhoka Mat Khao.”

This mantra will help investors be in that 45 per cent bracket of companies which actually make positive returns or target those 17 per cent companies which beat 15 per cent required equity returns threshold.

Now, how can investors like you avoid wealth destroyers and pick wealth creators? Let’s understand that.

Don’t try and time markets: Catching tops and bottoms is a difficult feat which can take years to master. It is better to enter when you can squeeze out the maximum juice in a stock. For instance, if you would have entered JK Lakshmi Cement in 2018, by 2020 you would have lost capital just because the stock was in a downcycle. Understanding cyclical and secular patterns is extremely essential while picking the right stock.

Avoid tips and diversify risks: There is no dearth of “hot tips” but selecting the ones based on your risk appetite and research will enable your portfolio to make better returns and not fall for traps. Suppose your portfolio has 75 per cent weightage in financials and then you add Canfin Homes, your risks will become concentrated even more. If financials face a weak year, your entire portfolio can underperform. Hence, rely on risk diversification and don’t add all your eggs in one basket.

Beware of stagnant players: Companies have to adapt with time. For example, Kodak failed to adopt modern trends and hence they were forced to shut shop. But in contrast, Pidilite Industries has constantly grown their strategy with time. From adhesives to now water proofing, they believe in running with the tide and competition and not staying put, waiting for things to change around them.

Value over price: It is a myth that all Nifty50 stocks will always make strong returns for you. It is also a myth that a low-priced stock makes for a great opportunity. Instead, the focus should be on value and not price because even a high-priced stock like MRF can offer a high potential for growth compared to a Suzlon which is trading sub Rs 10 per share levels and has been a wealth destroyer.

Forced mean reversion: Investors feel if a stock price has risen a lot, it cannot rise further. If growth is strong and tailwinds are in place, a rerating in valuation is likely rather than steep correction. Take for instance HDFC Bank, which has given CAGR 20 per cent + in last 20 years and it continues its secular up-move. Picking up such compounding bets on every correction would be more prudent than never entering HDFC Bank at all, just because the share price has moved up already.

Such poor decisions are majorly irreversible and do more harm than one can realise. Stock selection is a tricky art with a success rate of less than 20 per cent and investors are at a serious disadvantage most of the times. But there are tools which rate stocks and analyse over 2 crore data points on a fundamental, technical, margin of safety perspective after removing any form of human bias.

Stock Ratings enable us to pick top rated stocks while filtering out the wealth destroyers on 50+ parameters. With so much happening around these companies, it is impossible for any one person to keep track of everything, hence an automated tool based on Giga trading technology does the job for us and keeps us updated.

Stock Ratings is a win-win tool for investors as creating wealth by disciplined investing becomes simpler and the power of compounding enables you to have a smooth retirement.

The author is Head of Equity Research, Samco Securities

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