Most of us have relatives who like to fashion themselves as ‘stock-gurus’, with their stories revolving around how they ‘could have been’ millionaires now, if only they had held their nerves. The stock that comes up frequently in these conversations is Infosys. If you had invested Rs. 9,500 to buy 100 shares of Infosys in the IPO (that went undersubscribed in 1993), 51,200 shares (adjusted for bonus issues) worth sum of Rs. 4,89,70,240 would be in your kitty.

Infy has given CAGR returns of whopping 42.6% to investors during last 24 years (that too after keeping dividend payouts aside). Infosys got listed in June 1993 at price of Rs. 145 per share and investment of Rs. 9,500 in June 1993 is valued at 4.9 crores today. But, is Infosys still the key to riches? As often repeated, past performance is no guarantee of future results. So, how does one find out the next ‘Infy’?

A Fast Grower is a small yet aggressive & nimble firm, which grows roughly at 20-25% a year. This is an investment category which can give investors a return of 10 to as much as 200 times the investment made by them. No doubt, it remains a favourite of Peter Lynch!

In 1950s, the Utility & Power Sector were the fast growers with twice the growth rates to that of the US GDP. As people got more power-hungry gadgets for themselves, the power bills ran through the roof & the power sector surged with booming demand. Post the Oil Shock in 70’s, cost of power generation became high with power tariffs going up; people learnt to conserve electricity. Demand, thus, fell and power sector witnessed a slowdown. Prior to it, similar decline was observed in the Steel Sector & Railroads. First, it was the Automobile Sector, and then the Steel, followed by Chemicals & Power Utility & now the IT Sector is showing signs of slowing down. Every time, people thought, rally in the fast growers of the age would never end, but it did end, with people losing money as well as their jobs. Those who thought differently like Walter Chrysler (founder of Chrysler Corporation), who took a pay cut and left the railroads to build new cars in the turn of the last century, became the next millionaires.

Three phases involved in their life cycles, are:

1. The Start-Up Phase: Majority of the companies either burn up all the cash or run out of ideas by the end of this phase. Maximum casualties have been observed here, making it one of the riskiest phases. However, maximum returns can be made from them, if one enters near the end of this phase.

2. Rapid Expansion Phase: The Company’s core proposition has worked now, with the strategy being replicated by expansion of product/service portfolio or consumer touch points.

3. Mature Phase: Growth slows down, either due to high debt or low cash, owing to the massive expansion witnessed in early stage. Fall in demand or legal restrictions might also contribute to faltering growth.

The trick is to track, which phase the organization is in, at the moment. If the firm is in late start-up phase with possibility of moving to rapid expansion phase, buy the stock when it is still cheap. Once firm’s earnings start falling with its products witnessing poor demand, it’s time to bid goodbye to the stock.

The key parameters involved in Peter Lynch’s ‘two minute drill’ are:

1. P/E Ratio: avoid stocks with excessively high P/E

2. Debt/Equity Ratio: should be low

3. Net Cash per Share: should be high

4. Dividend & Payout Ratio: should be adequate

5. Inventory levels: lower the better

Stay away from companies which are being actively tracked, followed & invested in by large institutional investors. News about buy back of shares or internal stakeholders increasing their stakes should be construed as positive.

Checks specific to Fast Growers:

1. The star product forms a majority of the company’s business.

2. Company’s success in more than one places to prove that expansion will work.

3. Still opportunity for penetration.

4. Stock is selling at its P/E ratio or near the growth rate.

5. Expansion is speeding up Or stable

One must judiciously walk the tightrope between the unquestioning belief that made the stock to be held for so long and the fear of the end from nose-diving prices due to a one-off bad year. The key is to always keep revisiting the story & ask some pertinent questions like ‘What would really keep them growing?’, ‘What is their next offering? or ‘Are their products & services still in vogue?’ It is here, that one must track the point of time when the phase 2 of the firm’s expansion comes to an end. This is usually the dead-end for organizations as success is difficult to be replicated. Unless, innovation happens, downfall is imminent & thus, an exit is necessary. P/E of these stocks is drummed up to unrealistically high levels by the madness of crowd towards the end. One must keep one’s eyes & ears open to signs, which mark the end of the road for these fast growers. A great case in point is Polaroid which had its P/E bid up to 50, only to be rendered obsolete later by new technologies.

A sure shot sign of a decline is a company which is everywhere! Such a company would simply find no place to expand any further. Sooner, rather than later, such a company would see its ‘Manhattans’ of earnings reduced to ‘plateaus’ of little or no growth, simply because no space is left to expand further.

1.The quarterly sales decline for existing stores.

2. New stores opening, though results are disappointing: weakening demand, over supply.

3. High level of attrition at the top level.

4. Company pitching heavily to institutional investors talking about what Peter Lynch calls ‘diversification’.

5. Stock trading at a P/E of 30 or more, when most optimistic estimates of earning growth are lower than 15-20%, thus, unable to justify the high price.

Fast Growers, which pay, are ephemeral & one misses them more often than not. It is a High Risk & High Gain Category of Stocks. One must remember along the classic risk & return principle, that when one loses, one loses big! So, if you are in the quest for magnificent returns, a Fast Grower can be your bet provided you know when to bid Goodbye!

Cash Cow

However, the useful life of power plants spans many years and when the debt on the plant is repaid the facility can become a real cash cow for the utility.

For other industries, a large debt load may signal something seriously wrong. Of course, any company might pickup a big note if it just bought a building or a competitor.

There are several tools you can use to determine whether a company is exposing itself to too much debt.

The first is the Debt to Equity Ratio. This ratio tells you what portion of debt and equity is used to finance a company’s assets.

Formula

The formula is: Total Liabilities / Shareholder Equity = Debt to Equity Ratio.

A ratio of 1 or more indicates the company is using more debt than equity to finance assets. A high number (when compared to peers in the same industry) may mean the company is at risk in a market where interest rates are on the rise.

If a company has debt, it has interest expenses. There is a metric called Interest Coverage that will give you a good idea if a company is having trouble paying the interest charges on its debt.

The formula is: EBITDA / Interest Expense = Interest Coverage.

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and measures the operating performance of a company before accounting conventions and non-operational charges (such as taxes and interest).

Ratio

The resulting ratio tells you whether a company is having trouble producing enough cash to meet its interest expense. A ratio of 1.5 or higher is where companies want to be. A lower ratio may indicate that the company has trouble covering interest expenses as well as other costs.

Debt is not a bad thing when used responsibly. It can help businesses grow and expand. However, misuse of debt can result in a burden that drags down a company’s earnings. 

We learnt from the great crisis of 2011 that companies with high debt on their books simply get slaughtered. While debt per se is not bad (if the company is able to borrow at a lower rate and deploy it in its business at a higher rate, the operating leverage works in its favour), excessive debt with high interest and repayment obligations can crunch the stock in times of downturn. So, as a long-term investment philosophy, it is best to steer clear of high-debt companies. 

Avoid Investing in Companies with High Capex Requirement 

We know the demerits of investing in stocks like Suzlon & GMR which have an insatiable appetite for more and more capital. To feed their perennial hunger, these companies dilute their equity by making FPOs, GDRs & FCCBs resulting in total destruction of shareholders wealth. Companies should be lean and mean requiring minimal capital but generating huge returns there from. 

Dear Reader,

A small investment of Rs. 10,000 a month over a period of 10 years can help you create a corpus of Rs. 25 lakhs. Total amount invested over period of 10 years by you will be Rs. 12 lakhs and you will have profit of Rs. 13 lakhs. Not Good? This might look less to you as we are assuming returns of 13.5% per annum. If we assume returns of 27% per annum, your corpus will be Rs. 50 lakh and your profits would be more than 3 times of your actual investments that too when you are investing a nominal amount of Rs. 10,000 on monthly basis. Impressive! Right?

You might think that investing in mutual funds could be one of the way to start SIP (Systematic Investment Plan). However, returns may not be that high which you can generate by directly investing into good quality small and mid cap stocks. Hence, we suggest our members to start SIP by directly investing in stocks every month. What you are suppose to do is to invest your savings in a particular stock once in a month instead of putting it into mutual fund. Next month, same amount would be invested in another stock which at that point of time gives you good medium to long term investment opportunity. This could be an ideal choice for salaried employees as well as businessmen / entrepreneurs, as it will help you to directly invest in fundamentally strong small and mid cap companies to build a diversified portfolio of high quality small and mid cap stocks over a period of time to achieve wealth creation.

Investing in stocks is a great way to build your diversified investment portfolio. It is a simple and time tested approach for accumulation of wealth in a disciplined manner. Simply get some savings from your monthly income and invest in equities for long term. It not only allows you to save every month in a disciplined way but also help you ride through ups and downs of stock market.

Invest some portion of your monthly income in good companies without  timing the stock market and you will definitely get rewarded in long run.

Just take care of Basic Principle of Investing in Equities:

1. Invest in stock market with a long term view (3 - 7 years or more).

2. Invest in companies which are fundamentally strong with scalable business.

3. Follow disciplined approach by Investing regularly in equities.

4. Build a diversified portfolio by investing in small & mid cap companies.

5. Avoid frequent buying / selling of stocks, Its trading not Investing!

6. Review performance of your holding companies at least once a year to decide whether to buy / sell or hold.

Hidden Gems - SIP Returns @ 256.2% Vs Small Cap Index Returns @ 73.2%

It gives us immense pleasure to share that average returns of Saral Gyan 64 Hidden Gems stocks (Our Unexplored Multibagger Small Caps) released since inception (from Sept 2010 to Dec 2016) during last 6 years is 256.2% compared to 73.2% returns of BSE Small Cap Index. Monthly investment of Rs. 10,000 in Hidden Gems till Dec'16 during last 6 years not only allowed you to save Rs. 6.4 lakh but also appreciated your investment by more than 2 times making your total Hidden Gems stocks portfolio of Rs. 22.8 lakh with overall profit of Rs. 16.4 lakh. However, if you would have invested the same amount in Small Cap index, you would be sitting with overall gains of Rs. 4.68 lakh.

Below is our Multibagger Stocks - Hidden Gems performance scorecard since inception  (from Sept 2010 to Dec 2016) which illustrates value of Rs. 10,000 invested every month in Hidden Gem (Unexplored Multibagger Small Cap Stocks) stock of the month vis a vis value of Rs. 10,000 invested in BSE Small Cap Index during last 6 years as on 26th May'17.
We are glad to inform you that 42 Hidden Gems stocks out of 64 during last 6 years have given more than 100% returns to our members. Moreover, 32 stocks out of these 42 have given returns in the range of 200% to 1800%.

Note: Total 64 Hidden Gems stocks were released (till Dec'16) during last 76 months, we have not released Hidden Gems for the months not displayed in the table above.  

We also suggested our members, which earlier recommended Hidden Gems stocks can be added more in their portfolio based on company's strong fundamentals. Ex: Mayur Uniquoter, Cera Sanitaryware, Wim Plast, Camlin Fine Chemicals, Acrysil, Kovai Medical, Superhouse, De Nora, Atul Auto, Control Print and Stylam Industries were some of the stocks which we recommended to our members to accumulate later also at higher price from our initial recommended price. Now profits can be seen as these stocks have given multibagger returns.

As we made most of these reports public, you can access read / download our research reports by clicking on the Read / Download link:

1. SAB TV NETWORK >>> Rec. Date: 05 Sep'10 >>> ROI: 890% >>> Read / Download

2. DE NORA >>> Rec. Date: 07 Nov'10 >>> ROI: 225% >>> Read / Download

3. CAMLIN FINE >>> Rec. Date: 27 Mar'11 >>> ROI: 1243% >>> Read / Download
4. WIM PLAST >>> Rec. Date: 30 Aug'11 >>> ROI: 1522% >>> Read / Download
6. CERA SANITARY >>> Rec. Date: 24 Dec'11 >>> ROI: 1760% >>> Read / Download
7. SUPERHOUSE >>> Rec. Date: 29 Feb'12 >>> ROI: 212% >>> Read / Download
8. MAYUR UNIQ. >>> Rec. Date: 31 Mar'12 >>> ROI: 560% >>> Read / Download

9. PREMIER EXPLO. >>> Rec. Date: 22 Jul'12 >>> ROI: 490% >>> Read / Download
10. ROTO PUMPS >>> Rec. Date: 05 Aug'12 >>> ROI: 420% >>> Read / Download
12. ACRYSIL >>> Rec. Date: 25 Nov'12 >>> ROI: 352% >>> Read / Download

13. BAMBINO AGRO >>> Rec. Date: 25 Dec'12 >>> ROI: 363% >>> Read / Download

14. TCPL PACKAGING >>> Rec. Date: 31 Jan'13 >>> ROI: 755% >>> Read / Download

15. ATUL AUTO >>> Rec. Date: 28 Feb'14 >>> ROI: 197% >>> Read / Download

16. RANE BRAKE >>> Rec. Date: 31 May'14 >>> ROI: 440% >>> Read / Download

17. DYNEMIC PROD. >>> Rec. Date: 29 Jul'14 >>> ROI: 214% >>> Read / Download

18. ASIAN GRANITO >>> Rec. Date: 29 Sep'14 >>> ROI: 261% >>> Read / Download

19. CONTROL PRINT >>> Rec. Date: 30 Nov'14 >>> ROI: 58% >>> Read / Download

20. PLASTIBLENDS >>> Rec. Date: 31 Jan'15 >>> ROI: 110% >>> Read / Download

21. MOLD-TEK PACK >>> Rec. Date: 22 Mar'15 >>> ROI: 171% >>> Read / Download
22. VISAKA IND >>> Rec. Date: 05 Jul'15 >>> ROI: 179% >>> Read / Download

23. CHEMFAB ALKAL. >>> Rec. Date: 06 Sep'15 >>> ROI: 178% >>> Read / Download

24. ULTRAMARINE >>> Rec. Date: 11 Oct'15 >>> ROI: 115% >>> Read / Download

25. STYLAM IND. >>> Rec. Date: 08 May'16 >>> ROI: 240% >>> Read / Download
We are confident that we will continue to hunt best Hidden Gems from universe of small caps by doing authentic, in-depth and unbiased research work and support our members to make educated investment decision.

Through Hidden Gems and Value Picks, we are providing you opportunities to invest in such small / mid cap stocks today. Infosys, Pantaloon, Dabur, Glenmark were the small cap stocks in past and today are the well known companies falling under mid and large cap space.

The stocks we reveal through Hidden Gems & Value Picks are companies that are either under-researched or not covered by other brokers and research firms. We keep on updating our subscribers on our past recommendations suggesting them whether to hold / buy or sell stocks on the basis of company's performance and future growth outlook.

Time has shown that smart investors have made their fortune by investing in equities in long term. None other asset class can match giving you such extra ordinary returns. Yes, its important for you to invest in right set of companies at right price with medium to long term perspective. If you think to invest in stocks for period of 3 months or 6 months, we suggest you to stay out of stock market because you are not investing, you are betting on volatility of stock market which could be risky.

Below are the 6 Important Steps to Explore Best Stocks 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 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% from all time highs made in 2007 - 2008. This is because they have high debt level which means higher interest payments. In case of liquidity crisis and global slowdown, it would be extremely difficult for such companies 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! In fact you can expect much better returns than any other asset class in medium to long term. Buying or selling will depend on how your stock(s) perform on the above analysis.

If you find it difficult to follow above steps to explore high quality stocks with strong fundamentals, leave it to us. Simply subscribe to Hidden Gems (Unexplored Multibagger Small Cap Stocks) and Value Picks (Mid Caps with Plenty of Upside Potential) and start building your portfolio of high quality small and mid caps to get rewarded in medium to long term.

The stocks we reveal through Hidden Gems & Value Picks are companies that either under-researched or not covered by other stock brokers and research firms. We keep on updating our members on our past recommendation suggesting them whether to hold / buy or sell stocks on the basis of company's performance and future outlook.

Dear Reader,

In the stock market there is no rule without an exception, there are some principles that are tough to dispute. Here are 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Ride the winners not the losers

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:

Riding a Winner - The theory is that much of your overall success will be due to a small number of stocks in your portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

Selling a Loser - There is no guarantee that a stock will bounce back after a decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well, as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

2. Avoid chasing hot tips

Whether the tip comes from your brother, your cousin, your neighbour or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; get into the basics by doing research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out but they will never make you an informed investor, which is what you need to be to be successful in the long run. Find out what you should pay attention to - and what you should ignore.

3. Don't sweat on the small stuff

As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few bucks difference you might save from using a limit versus market order.

Active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Don't overemphasize the P/E ratio

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.  

5. Resist the lure of penny stocks

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a Rs. 5 stock that plunges to Rs. 0 or a Rs. 75 stock that does the same, either way you've lost 100% of your initial investment. A lousy Rs. 5 company has just as much downside risk as a lousy Rs. 75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6. Pick a strategy and stick with it

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

7. Focus on the future

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with one of the stock he bought demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought it as stock price already went up twenty fold. But I checked the fundamentals, realized that company was still cheap, bought the stock, and made seven fold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

8. Adopt a long-term perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire.

9. Be open-minded

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Small Cap Index, and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains. We have already experienced the multibagger returns from lesser known companies recommended under Hidden Gems service in past, our stock picks like Camlin Fine Sciences, TCPL Packaging, Kovai Medical, Wim Plast, Acrysil, Mayur Uniquoters, Balaji Amines, Rane Brake Linings etc have delivered returns in the range of 500% to 1800% over period of 2 to 5 years.

10. Don't miss to diversify your equity portfolio

Its always wise to have stocks from different sectors and Industries. Do not expose your self to many stocks from the same sector. Be it IT, Consumers, Finance, Infrastructure, Pharmaceutical or any other sector, you must have a proper mix of all with suitable allocation based on future outlook of that sector and industry. Most of the companies from capital goods and Infrastructure sector have not performed since last 6 to 7 years but private banking stocks, NBFCs, consumers and automobile companies stocks are making new all time highs. Hence, its important to stay diversified with your stock investments.

Wish you happy & safe Investing!

Regards,
Team - Saral Gyan.