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Tuesday, November 19, 2013

Simple & Effective Strategy For Buying Winning Stocks

If we stick to basic rules of investing and put our money in fundamentally strong small and mid cap stocks, we will have multibaggers in our portfolio. We have a long list of super-duper multibaggers like Jubilant Foodworks, Page Industries, Amara Raja Batteries, Natco Pharma, De Nora, Cera Sanitaryware and Mayur Uniquoter.
It is obvious that this consistent success is not the result of chance or good luck. Instead, there is a carefully thought out strategy behind it. Below are some of the strategies which an investor needs to always follow for buying winning stocks.
1. First identify the sectors doing well and then the best stocks in it:
There are two well-known strategies for buying stocks – the “top down” approach, in which you focus on the Industry / Sector (e.g. consumer non-discretionary), and the “bottom up” approach, in which you focus on individual stocks (e.g. Page Industries).
We follow a unique method that is a combination of both methods. We buy only the best stocks in the best performing sectors. Applying this method in past, we have avoided investing funds in dud sectors like realty and infra even though individual stocks looked very promising.
2. Buy stocks only if the requirements in the check-list are met:
We follows a rigorous process of checks and balances before we trust a stock offers right investment opportunity. These are:
(a) Know the management and its credentials / pedigree;
(b) Understand the business model and growth prospects of the company;
(c) The company must have positive cash flows;
(d) The debt must be Nil or negligible;
(e) The company must have pricing power and not be vulnerable to excessive competition.
3. Focus on information & not on hype:
In times of boom and bust investors tend to carried away by the noise around them. We advice investors to be rigidly focused on tangible information in the form of financial statements. “Never get carried away by the cacophony and hype on Dalal Street”. Its always wise that investors should “identify the nuts and bolts that drive the growth and profitability of the company”.
4. Recognize your mistakes and cut your losses:
This is very important, most investors suffer from “loss aversion” and like to be in denial that they have made a mistake. If they want to raise money, they will sub-consciously sell the stocks where they have a profit but not those where they have a loss.
Considering our own experience where we made mistake by recommending investments in stocks like Firstobject Technologies and National Plastic. Once we knew that we had committed a blunder, we dispassionately ask our members to cut their losses before they could do further damage to their portfolio.
We are sure that by following our “old-fashioned” style of picking stocks after doing thorough research should help all of us to grow our money and become better investors.