How do I successfully pick stocks?

You might have heard big names like Rakesh Jhunjhunwala or Warren Buffet among top investors. Nevertheless, how do these people create wealth? What is the success mantra they follow?

The art of picking the best stocks to invest in does not have a single answer. Stock selection is not rocket science and It depends on many factors, such as the return you are expecting, your, risk management approach, time availability, and market study as well as capital you want to invest in. What you need to do is to beat the market by selecting a good set of stocks or businesses to generate more returns. You may either pick a passive or active investment strategy. Passive investment can be summarized as a “buy and hold” attitude or mantra for a longer-term. A stock purchase means you become a shareholder of the company, so a proper study is required hence every investment decision should be backed by reliable and strong research recommendations.

The value-investing guru, Benjamin Graham, has tried different ways to find stocks that trade at a discount to their actual value. He has named it “value investing” and it involves picking shares that are priced below their intrinsic value. However, it is a contrarian strategy and different investors use different methods to invest in the market.

The method of choosing the right stocks can also be frustrating, potentially expensive or risky, and hence could be a major loss if not done with the right approach. You would hear tales of people being millionaires. Nevertheless, this is not a clear picture and patience is very critical. You should wait for 10-15 years to realize the fruits of your investing here the power of compounding works. Greediness in making fast cash from the stock market would only lead to big losses. You need to work hard to educate yourself and find stocks that will rise in value in the future.

To find the best stocks two things techniques, which work, in explaining are the following:

Fundamental analysis  

Technical analysis

Fundamental analysis helps in identifying the best shares to buy by evaluating whether the market price of stock completely represents the potential for revenue generation. Technical analysis helps in identifying the best stocks to buy based on historical trends. This involves trends and patterns that may suggest the market's potential movements.

Further fundamental analysis can be best described in two concepts the top-down and the bottom-up approach. The top-down represents the bigger picture and focus on overall economy like GDP, monetary policies and inflation, bond prices, etc. before selecting a sector or a company. The bottom approach concepts focus on the analysis of Individual stocks and how sees how its competitors are performing in the market. You need to check factors like financial ratios revenue and sales, cash flow, management, and products.

Here are some of the things you can consider while picking up stock

Business model, you should check if the business model is viable in the future and will keep doing better in the future. A profit-generating and diversified business base is a good factor to consider. In short, you should check the true nature of the company along with the company's past financial track record to see if the latest policies and programs are potential value generators. 

Investment goals it is important to define what amount of returns you are expecting from your investment. Questions such as how many stocks to buy, quality of the stocks, return expected, etc 

Valuation of stocks The key is to find the underlying value of the stock or (intrinsic value) meaning how worth the stock is and may differ from market value, or we can say undervalued or overvalued subjected to market conditions, news, cyclical fluctuations, or misjudged calculations. It can be done in quantitative and fundamental terms to get a clear picture.

Capital – it is important to define what portion of capital you should invest in your income in the market. You should not invest all your money in the market. 

Events - The market is uncertain and volatile, any news negative or positive like economic events (interest rate changes, company changes (top management), political events can affect market perception. So it is important to know what is the risk level attached to the company based on the business model.

Diversification- Diversification of the portfolio is the key. A diversified portfolio or the right mixture reduces the risk of a loss. An individual appetite to risk also plays a major role in selecting a company. 

Sector Analysis- The performance of the sector should match the performance of the economy. Invest in those sectors that you understand, do not invest in all industries. Time Horizon- Decide how long you want to hold the stock. The power of compounding works when you stay invested for a longer time.

Emotional control- You should not let your investment decisions overcome emotions. You should control your anxiety while hurrying to invest in stocks based on rumors and speculative news.

Financial condition- Ratios like Price-to-earnings (P/E), Debt-equity ratio (D/E), Return on equity (ROE), Price-earnings to growth (PEG) ratio, Relative dividend yield, are some important ratios which tell you about company performance or relative comparison with the peers. Understand the company’s balance sheet, income statement, and cash flow.

Source of Information- The source of information should be authentic and reliable. You should also check for the credibility of your financial planners or research reports for instance equity research reports. It is equally important to check the right broker as well.

In the end, it depends on your investment plan, research, the stock you purchase. The idea is to choose a diversified portfolio within the risk management framework, a right a mixture of growth and defensive stocks, to ensure that risk can be managed effectively. Make your investment regularly and track them. Long-term investors more rely on fundamental analysis whereas short-term traders focus on technical analysis more. However, both forms of analysis are significant, and ignoring either of them potentially overlooks valuable information. Value investing is like an ocean and may not fit for every investor because you may need to go on a long walk evaluating stocks company's financial analyzing financial statements, annual reports, and financial information, etc. before investing.