Harinee asked me to share some thoughts on analyzing stocks, and I told her that my ideas would probably disappoint her because they are so simple but in any case, I’m writing some thoughts on the first step of investing which is akin to generating leads or just finding out which stocks should be researched further to see if they make a good case for a long or a short.
I would say there are five main ways that I discover which stocks to invest in, and I’m listing them here.
1. Great products: In the long run, behind every great stock, there is a great company that’s selling great products or services so whenever I see a product that wows me I try to find out if the company that makes it is listed and how big is this product to their revenues. Sometimes others give you the hint like when your sister in law yells at you for buying the wrong brand of glue. That should surely pique your interest to see if Pidilite is the one making it, and are they any good at making other great products that bring in profits.
2. An interesting theme: While the first point was about bottom up investing, this one is about top down investing. I’m a big fan of 3D printing and am always very interested to see if there are any companies in this space that can be invested in. So, this is an example where you think of themes or sectors first and then see if there are listed companies in those sectors. Drones is another theme I’m currently interested in as the Obama administration seems to have shown that they are the way to go and I feel other countries are going to catch up on this. I don’t think there are any companies that you can invest on based on this theme today, but that might change tomorrow.
3. Twitter: In recent times, Twitter has been a good source of lead generation for me because I follow a lot of people who are a lot smarter than I am, and in looking through their conversations you discover stocks that you wouldn’t have otherwise thought about.
4. Non stock market business magazines: I feel that business magazines that don’t focus on stocks do a great job of showcasing small companies that are doing well, and magazines like Business India, Business Today and Business World are very useful to do this in the Indian context.
5. Looking at what fund managers are buying: I do this a lot and while I admit that this is a lazy way and hasn’t worked all that well for me, somehow it is very tempting to invest in shares that bigger investors are investing in because it feels like they have spent so much time and money on it – how can they be wrong? They are of course wrong most of the time.
These are some thoughts that I had, and while it is easy to get carried away in the current market environment, if you are interested in directly investing in shares you should definitely read my post on the big risk on investing in stocks directly or more importantly read the comments on that post.