Five Pillars of Value Investing In Equities For Beginners

One can invest in equities in various ways. Through mutual funds, directly in stocks in the primary market through the initial public offering (IPO) route, or by buying stocks from the secondary market, either in the cash segment or through derivatives (futures and options). A word of advice for beginners: start by investing in mutual funds or dealing only in the cash segment in the stock market; avoid trading in futures and options. Trading in derivatives is a highly speculative venture that requires due skill and carries high risk. 

For a beginner, dealing in the cash segment of equities should be the first step. The following five pillars of value investing should prove helpful for relatively safe and better returns.

1. Knowledge and information

The key to success in stock investing is knowledge and information about stocks in general and a few specific stocks in particular. A major source of such information is business newspapers and magazines, business TV programmes, and interviews with company management and market and financial experts. Once you have made up your mind to trade in the stock market, devote value time on understanding the nuances. When you start investing, for a month or so, invest in stocks of companies that are in your field of interest and experience. This will help you develop some conviction and confidence. Remember, it’s not timing the market but spending time in the market and gathering knowledge that’s important.

You also need to be sure whether you want to be a trader or an investor. This is important because the approach in both cases is very different. While trading on a day-to-day basis is a short-term bet, investing ought to be a long-term play of at least a year, or more. Staying invested for more than a year also helps in saving income tax. As a beginner, with the main goal being wealth creation, investing with the aim of building a portfolio for the long term, rather than day trading. An easy way to put to practice one’s basic learning is to initiate dummy transactions in 4-5 identified stocks for some time and see how that goes.

2. Company’s promoters and business model

This is among the prime considerations when choosing a stock. A promoter is like a driver of a vehicle. A good driver in itself can ensure better running and upkeep of the vehicle. So, a company promoted and managed by creditable promoters and managers, who have a proven background and track record, is likely to perform well. Though past performance and records are no guarantee of future performance, a proven track record can’t be ignored altogether. Therefore, under normal circumstances, a considered analysis helps. 

 Choosing companies that have innovative and futuristic business models should instill confidence. At present, the companies focused on IT in general and digitisation or cloud technology in particular, renewable energy and electric automobile companies offer excellent opportunities. Initially, investment in cyclical stocks should be avoided.

3. Market scenario and policy environment

This includes market trend, price volatility of a stock, performance of peers and of the sector, broker or expert comments and expectations, corporate and policy framework etc. International as well as domestic market environment and policy framework impacts stock markets immensely. While the market environment impacts all types of equities, stocks of cyclical sectors are impacted the most, leading to sharp swings either way in their prices. In this regard, the growing interest and emphasis of the government on renewable energy has brought all main line or related ancillary industries in sharp focus as hot favourites. Companies dealing in solar energy, wind energy and ethanol should get attention .

4. Buying and selling decisions

The decisions of what and when to buy, and when to sell a stock are pivotal for successful investing in equities. Remember that in the stock market, opportunities knock on your door not once but multiple times. Hence, one must judge and weigh an option and go shopping with conviction. Therefore, wait and watch is a golden rule in the stock market. To begin with, buy stocks from evergreen sectors like IT, pharma, banking and financials, etc., at a reasonable price, following a systematic investment plan and for the long term. Also keep your portfolio diversified, i.e., not all eggs in one basket.

Set a relatively realistic price target of your stock for sale. And sell it as soon as it meets your expectation, devoid of undue greed. However, do not sell a value stock in full, on which you have conviction. As a thumb rule, during turbulent times, buying a value stock when everybody is rushing to sell, and selling when others want to buy, generally proves beneficial. Avoid panic selling during such a situation.

5. Profit booking

The fifth pillar of value investing is profit booking with apt target setting, depending on the expectation of realistic returns. While dealing in the stock market, we must understand the logical price target, both for buying and selling a stock, as also for profit booking. Justifiable profit booking helps in wealth creation. Also, if the funds are not required urgently, the profits partly or in full, may be ploughed back to expand or strengthen the portfolio, by buying chosen stocks.

It is advisable to book profits at an appropriate time and at a realistically targeted price, say, with 25 per cent, 50 per cent or 100 per cent profit, depending upon market conditions. Keeping profit in the bank is better than keeping it in books. Logical profit booking also helps one prepare to weather stormy markets and protect your capital. Don’t be greedy, but also don’t repent on seeing the stock rebound after you have sold it. In such a situation, look for an opportune time to re-enter with conviction. 

The author is a former employee of the Government of India and has worked in the agriculture secto