Every investor's situation is unique, and you have to make all the right moves that are right for your own situation.

You can use the following list to stimulate your own thinking and make your own checklist and moves.

1. Get the Most from Your Cash:

If you have cash in a money-market fund, you know you're not making much money. You can probably do better than you think if you're willing to do a bit of shopping.


2. Shop for Interest Rates:

If you have money in a bank, find the highest interest rate you can to protect you against inflation.

3. Review Your Emergency Fund:

This should be money you don't think you will need any time soon. Try to make this money work harder for you.

A short-term bond fund will pay more than a money-market fund without much additional risk. If you think you probably won't need this money for four or five years, consider using a fund that owns both stocks and bonds.

4. Check Your Asset Allocation:

The way you allocate your assets is the most important investment decision you will make. Your investment plan should specify your percentage allocations between fixed-income and equity investments.

Within the equity part of the portfolio, you should have target allocations for funds as well as for big-company stock funds and small-company stock funds. Your plan should also specify how much is to be in value stocks and how much in growth stocks.

If you have a financial advisor, set up a meeting to evaluate your current allocation. The advisor can suggest any necessary changes.

5. Rebalance your Investments:

When equities seemed to go through the roof, your investments may have taken you some distance from the proper allocation you determined for yourself.

If you began the new year with a portfolio equally split between stock funds and bond funds, you might be able to change it with about 60 percent of your total in equities and only 40 percent in fixed-income funds. What's wrong with that? Too much risk. A portfolio with 60 percent in equities is riskier than a 50-50 portfolio.

Rebalancing gets you back on track. And thereʼs another benefit:

By rebalancing you will be taking some of last year's profits "off the table" and spreading them around. This is called buying low and selling high. Rebalancing makes it automatic.

6. Diversify:

Maybe you think you're already properly diversified. But the vast majority of portfolios are not that well put together. Most portfolios are heavily over weighted in large-cap growth stocks. That may seem fine in a year like the one we just experienced.

But diversification pays off in good times and bad. It's a rare investor whose equity portfolio couldn't be improved by adding one or more of three kinds of funds:

Value, small-cap and international.

7. Determine Your Investment Policies:

Make a written investment policy statement for yourself. Investors who actually do this are far more likely to attain their goals than those who just casually think about it.

Writing a policy statement requires careful thought, but once it's done it will remind you rationally, when the market is trying to manipulate your emotions, what you should be doing and why.

8. Set Measurable Goals:

Write down your long-term financial goals and make a written retirement plan. That plan should specify a target year you want to retire and estimate how much retirement income you will need from your investments.

From there, you'll be able to tell how big your portfolio will have to be when you retire. For a quick rule of thumb, figure that on the day you retire, your portfolio should be 20 times the size of the annual income you want from that portfolio.

9. Make Specific Plans:

If this is starting to sound like serious work, then you're getting the point. There's no free lunch for somebody who would be a successful investor. But the payoffs from this step could be enormous. You could retire earlier or boost your retirement fund by hundreds of thousands.

At the very least, all this written work will give you a clear picture of where you stand so you don't need to rely on vague hopes or fears. Make a written pre-retirement plan showing how you will accumulate the nest egg you will need on your retirement day.

10. Execution:

Finally, keep looking for more things you can do in the coming years to strengthen your financial muscles.

6. Current assets must be at least double liabilities.

Here is a small summary of the three major approaches to investing:

1. Fundamental Analysis

Truly superior companies exist, are sometimes undervalued by markets, and can be identified by mostly financial research. Earnings and dividends, stock prices and markets can be adequately forecasted. All these can be identified by analysis of their financial statements. Buy where forecasted price is greater than current price by a satisfactory margin.

2. Technical Analysis

Patterns in past price behavior of a security in question and the overall market can be used to direct profitable trading strategies. Some technical analysts also refer to a company's fundamentals in combination with its technical indicators.

3. Efficient Market Theory

No possible market-beating investment strategy exists. All information relevant to a stock's long-term price performance, including information not publicly available, is already present in the stock price for any given period of observation.

And here are two more "truly real" ways to approach investing:

1. The Proud Way
2. The Humble Way

The proud way is for those who believe that they're smarter than everyone else and can use their insights and abilities to make superior investment choices.

The humble way is for those who believe that they don't know everything. This humble approach leads them to study what has worked over the long term and then use it.

The path to achieving investment success is in studying long-term results and finding a strategy or group of strategies that make sense.

This strategy is the humble way and it does work!

There are three ways to make investment decisions:

A. Market timing,
B. Security selection, and
C. Asset allocation.

Market Timing

Market timing, including all forms of charting and "technical analysis," doesn't work because nobody can predict the future. Markets move in response to millions of people acting on random daily news, which can't be predicted.

If someone could market time with as little as 51% accuracy, they'd be on the front page of every newspaper every day.

Everyone you see predicting the future is just guessing or are just trying to convince you to buy the stocks they just bought so they'll go up, and they can sell at a profit. It's their job to convince you that they can predict the future so they can move their products and sell their services. Over time, their "mistakes" will lose you way more money than their lucky calls will make you money.

The only people who have the actual data needed to forecast a stock's price are the people who work for the company - and they can't tell anyone because they'd in problem by breaking insider-trading laws.

There's just too many stocks, too much news, and it all happens way too fast to cope with. Company news comes out of nowhere and could bring a stock down before anything can be done about it.

That's way too risky, so individuals, and professionals that manage money for clients, should not waste time trying to pick stocks. But they love to do it because it's just so much fun to be a "player on the market."

It's humanly impossible to find the time to both manage clients' assets in a way to get the results clients need and expect, and keep up with thousands of stocks on a daily basis.

Some may get lucky here and there, but over time the losses of their "mistakes" will greatly outweigh their lucky picks.

Security Selection

The biggest problem with security selection is knowing when to sell. You don't need to be an expert to know when a stock you have been following will go up. Just wait for accelerating earnings growth.

This is usually when people buy because they feel "it's safe now that it's going up." But that's usually when it's time to sell.

Nobody wants to sell anything that's going up, especially when it's a "great company," so they wait to try to get a few more bucks out of it. That's when it goes back down before they can sell it.

Then the investor goes into denial - which usually results in holding it forever because they don't want to take a loss.

You want to buy stocks when the news is bad, and sell them when the news is good. But this is the opposite of what most people actually do in the real world.

These kinds of things alone should be enough to convince people that stock pickers are not to be relied on for anything but recommending stocks they already own so they will go up and sell at a profit, while clients who bought it on their recommendations are left holding the bag.

Asset Allocation

Asset allocation is the only thing that works for people who manage money either for themselves or for clients. It's the art and science of determining how much of the dozens of assets classes people should own based on their financial and life situation.

Asset allocation is very boring, and you're guaranteed to never double your money in one year. But it will most certainly get you the best long-term results.

There are two ways to think about investing in the stock market. You can think in terms of growth or value. They are different approaches, each with it’s own unique characteristics.

Growth Investing

Investing for growth means looking for companies that have potential to become a hot growth stock. Maybe they have a new innovative, unique, industry disruptive technology. Or maybe they are attached to some major news that’s being widely covered by the media. Currently, many health care stocks would be considered to have hot growth potential.

Another way a stock could grow is through acquisition. So these investors go around looking for public companies that are looking for buyers or have the potential to be acquired by another large company. Also, growth investors tend to look more at small cap stocks than at large caps.

Indeed there are mutual fund managers who specialize in growth funds, where they buy up companies with potential to grow or to be bought up. If you want to do growth investing but don’t have the time or resources to find these gems, these funds would be a good option for you.

Value Investing

Value investing is looking for companies with good fundamentals, i.e. a solid business model, good management, solid earnings, ongoing opportunities for future growth, no major defects, good financials and so on. You also want to find good companies with these qualities, but are trading at a discount.

That means looking for good companies that the market is undervaluing and buying them up when they are cheap. Warren Buffett is probably the greatest value investor in the world. This is how he has made his $40 billion of net worth, just by value investing.

There are also mutual funds that take the value approach. And you would think that most would go after large cap stocks, which many of them do. But surprisingly, many of them also small cap funds that go after value rather than growth. And the small caps have the added advantage that they are often overlooked by large institutional funds for a variety of reasons.

6 Steps to Explore the Best Stock for Investment

Step-1: Find out how the company makes money

Step-2: Do a Sector Analysis of the Company

Step-3: Examine the recent & historical performance of the Stock

Step-4: Perform competitive analysis of the firm with its Competitors

Step-5: Read and evaluate company’s Financial statements

Step-6: Buy or Sell


Step-1: Find out how the company makes money

Before you decide to invest in a company’s stock, find out how the company makes money. This is probably the easiest of all the steps. Read company’s annual and quarterly reports, newspapers and business magazines to understand the various revenue streams of the firm. Stock price reflects the firm’s ability to generate consistent or above expectation profits/earnings from its ongoing/core operations. Any income from unrelated activities should not affect the stock price. Investors will pay for its earnings from its core operations, which is its strength and stable operation, and not from unrelated activities. Thus, you need to find out which operations of the firm are generating revenues and profits. If you do not know that you are bound to get a hit in future.

Warren Buffet once said that “if you do not understand how a company makes money, do not buy its stock- you will always end up loosing money”. He never invested even a single penny in technology stocks and yet made billions and billions of dollars both during tech bubble and bust.

Step-2: Do a Sector Analysis of the Company

First is to figure out which sector the stock is in. Then, figure out what all factors affect the performance of the sector. For example, Infosys is in IT services sector, NTPC is in Power sector and DLF is in Real Estate sector. Half of what a stock does is totally dependent on its sector. Simple rule-Good factors help stocks while bad factors hurt stocks.

Let’s take an example of airlines industry. The factors that affect it are fuel prices, growth in air traffic and competition. If fuel prices are high, tickets would be expensive and hence fewer people will fly. This will hurt the airlines sectors and firms equally. This would make the sector less attractive because there would be less scope for growth of the firms.

The idea is to find out the good and bad factors for the sectors and figure out how much they will affect the stock and how. What we are really looking at are reasons that will make stock price good or bad or a company look more or less valuable, even though nothing about the company changes. This will give you a broader view whether the stocks will do well or poorly in the future.

Step-3: Examine the recent & historical performance of the Stock

By performance we mean both operational and financial performance of the company. Take out some time to find out how the company has done in its business over the years. Were there issues with its operations such as labor strike, frequent breakdowns, higher attrition or lagging deadlines? If any company has a history of serious problems, it does not make a good buy because chances are high it may have similar problems again. History is a good predictor of future! It is also extremely important to find out the historical financial performance of the company – growth in revenues, profits (earnings), profit margins, stock price movements etc.

Step-4: Perform competitive analysis of the firm with its Competitors

This is most important step in analyzing a stock. Unfortunately, most of the retail investors do not bother to do this. It takes time to do this step but it worth trying if you don’t want to loose your money. Many investors buy a stock because they have heard about the company or used the products or think companies have excellent technologies. However, if you do not evaluate or compare those features of the company with other similar firms, how will you figure out whether the firm is utilizing them effectively or is better/worse than others? We also need to find out whether company is growing rapidly or slowly or has no growth. We would like to cover couple of financial ratios here in brief and explain how to use them to figure out a good stock.

P/E: Price-to-earnings ratio is the most widely used ratio in stock valuation. It means how much investors are paying more for each unit of income. It is calculated as Market Price of Stock / Earnings per share. A stock with a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to the overall market, as investors are paying more for today's earnings in anticipation of future earnings growth. Hence, as a generalization, stocks with this characteristic are considered to be growth stocks. However, P/E alone may not tell you the whole story as you see it varies from one company to another because of different growth rates. Hence, another ratio, PEG (P/E divided by Earnings Growth rate) gives a better comparative understanding of the stock.

PEG = Stocks P/E / Growth Rate
We do not want to go into the calculation part as values for P/E are available on internet for most of the companies.
A PEG of less than 1 makes an excellent buy if the company is fundamentally strong. If it is above 2, it is a MUST SELL. If PEG for all the stocks are not very different, one with lowest P/E value would be a great BUY.

Step-5: Read and evaluate company’s Financial statements

This is the most difficult part of this process. It is generally used by sophisticated finance professionals, mostly fund managers who can understand different financial statements. However, there are few things that even you should keep in mind. There are three different financial statement- balance sheet, income statement and cash flow statement. You should focus only on balance sheet and cash flow statement.

Balance Sheet: It summarizes a company’s assets, liabilities (debt) and shareholders’ equity at a specific point in time. A typical Indian firm’s balance sheet has following line items:

• Gross block
• Capital work in progress
• Investments
• Inventory
• Other current assets
• Equity Share capital
• Reserves
• Total debt

Gross block: Gross block is the sum total of all assets of the company valued at their cost of acquisition. This is inclusive of the depreciation that is to be charged on each asset.

Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset is worth to the company.

Capital work in progress: Capital work in progress sometimes at the end of the financial year, there is some construction or installation going on in the company, which is not complete, such installation is recorded in the books as capital work in progress because it is asset for the business.

Investments: If the company has made some investments out of its free cash, it is recorded under it.

Inventory: Inventory is the stock of goods that a company has at any point of time.

Receivables include the debtors of the company, i.e., it includes all those accounts which are to give money back to the company.

Other current assets: Other current assets include all the assets, which can be converted into cash within a very short period of time like cash in bank etc.

Equity Share capital: Equity Share capital is the owner\'s equity. It is the most permanent source of finance for the company.

Reserves: Reserves include the free reserves of the company which are built out of the genuine profits of the company. Together they are known as net worth of the company.

Total debt: Total debt includes the long term and the short debt of the company. Long term is for a longer duration, usually for a period more than 3 years like debentures. Short term debt is for a lesser duration, usually for less than a year like bank finance for working capital.

One need to ask-How much debt does the company have? How much debt does it have the current year? Find out debt to equity ratio. If this ratio is greater than 2, the company has a high risk of default on the interest payments. Also, find out whether the firm is generating enough cash to pay for its working capital or debt. If total liabilities are greater than total assets, sell the stock as the firm is heading for disaster. This debt to equity ratio is extremely important for a company to survive in bad economy. What is happening now-a-days should make this extremely important. Companies having higher debt ratio have got hammered in the stock market. Look at real estate companies- their stocks are down by almost 90%. This is because they have high debt level which means higher interest payments. In the current liquidity crisis and global slowdown, it would be extremely difficult for them to survive. Remember, a weak balance sheet makes a company vulnerable to bankruptcy!

Step-6: Buy or Sell

Follow all the steps from 1 to 5 religiously. It will take time but worth doing it. If you do it, you won’t have to see a situation where you loose more than 50% of stock value in a week! Buying or selling will depend on how you stock(s) perform on the above analysis.