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Important Lessons learned investing in stock markets & Spotting Multibagger Stocks.

by DEEPAK SETHI about a year ago in advice
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Finding Multibagger Stocks is not difficult if your research and homework are good.

Photo courtesy Pixabay.

Stocks have always interested me from the time I came out of college. The ensuing bull market at the time made them all the more attractive when I saw them flying high and multiplying a number of times within months.

This was in sharp contrast to the fixed deposits which offered low but steady returns.

Thinking of becoming rich quickly I invested most of the two years of my saving into the stock markets after I started my first job.

And as luck would have it, this was the peak of the bull market, the stocks market crashed and my stocks began climbing down in value. Some of them were illiquid companies and were rarely traded thereafter. Many of the companies closed down in the next few years. It was only after five years that the stocks came back to their original price and I exited all of them.

The next bull market started in India in 2003 and I was afraid to invest in stocks after having burnt my hands once. The bull market lasted till 2008 and the stocks again multiplied many times in value.

I invested in a few stocks but did not get great returns as I was afraid that the market would collapse again. This time I missed the complete bull market and the massive wealth the bull market created.

This kept me thinking about how to invest to make gains. Finally, I decided to read some investment books.

I read all the investment gurus; Peter Lynch, Benjamin Graham, John Templeton, Philip Fisher and imbibed their investment principles.

I learnt the composition of the two Indian indices; the Nifty and the Sensex.

The next bull market started in 2013 in India, and I was ready with my investment philosophy. This time I spotted many multibagger stocks due to the books I had read and the experience gained over the years.

Though my learning was slow, I am happy to have spotted many multi-baggers in my career.

Here are some of the investment things that I consider before investing in stocks and would be happy if some of them are useful to you.

1)Do thorough research on all the parameters of the company

Never invest in any company before you have done the homework on the company’s earnings prospects, financial condition, competitive position and plans for expansion.

The fund managers go and meet managements to learn of their future plans but the least that can be done by people who are involved in day jobs or even freelancing is that they can go to the internet and do thorough research on the company of which they intend to purchase stocks.

2)Not all stocks will give great returns

Every stock you choose will not make money. Out of ten stocks even if five give good returns you would have made a good amount of money.

Suppose you invest $10,000 in each stock, the maximum you can lose is the entire investment amount. But another stock out of these can go to even make $50,000 for you. Even if five succeed you would be much better off.

3)Don’t monitor the stock price daily

If you are investing for long term don’t look at the daily movement of prices, even if the prices don’t rise much.

When the financial results are good you should be satisfied and look at the price after a month. The stock price will ultimately reflect the fundamentals. This way you would feel more relaxed.

Daily monitoring of prices will weaken your resolve of investing for the long term and if the price falls, you may sell the stock. When you sell the stock in desperation, you always sell cheap.

4) Search through the prospects of many promising companies

You should search for a number of companies which are promising. This is the first step.

The next step is to do thorough research on the companies so that you are able to find the most promising out of them for investment.

5) A multibagger stock

I bought the stock of Balaji Amines in 2010 and made 30 times return in 10 years. I sold it during Corona Pandemic; if I would have still kept it my return would have been around 80 times. I sold it during the panic.

It is a stock belonging to the chemical sector and as the chemical industry started to shift from China to India the stock also started to gain, with the increase in profits and sales.

6) Buying a stock at the right price

One of the most important things you have to be careful about is buying the stock at the right price. Even if it is a great company when bought at the wrong price it may take years to recover your money. This is especially the case when a stock is bought at the peak of a bull market.

7) Be prepared for losses

If you have to make greater returns than fixed deposits and bonds you have to accept the fact that you can make losses too. There may be some unexpected turn of events which you may not have thought about.

8)Invest for the long term

We should compare our long term stock investments to a house that we purchase.

We often boast that our house has appreciated many times in value. But just see the number of years you have held onto the house, without even glancing at the price daily. This is what we forget in case of stocks.

9)Invest only the surplus amount

The only way you can hold onto the stocks for the long term is when you don’t require the money immediately. Sometimes when you require the money urgently, you sell the stocks at a loss.

Do a thorough checkup, prepare a budget and invest the surplus money. If the money is required for a wedding or a child’s education in immediate future; don’t invest.

10)You can never predict markets

It is impossible to predict the markets. Though the economy is related to the condition of boom and busts in the market, it is difficult to predict the markets.

The best thing is to buy profitable companies for the long term. Anyone who says that he can predict the highs and lows in not to be believed.

11) Stock investing is better than bonds

It is to be remembered that the long term returns of stocks are always better than bonds.

12)Invest in the business

Always invest in the business and not the stocks. If you have an understanding of the business you will be better aware of the cycles and not get worried.

13)The types of companies in which you can invest can be categorized as follows:

· Stalwarts are companies like Colgate Palmolive and Hindustan Unilever and their earnings growth is generally 10–12%. They don’t rise very fast but they are good and safe during recessions as they do not fall too much.

Fast-growing companies- The companies grow at a 20–25% rate in a year. Due to the high growth rate, these companies can create multi-baggers, i.e. your money will multiply many times, maybe even 30–40 times, if kept for a decade or even lesser period of time horizon.

If it a restaurant chain or a fast-food chain, check if it has been able to successfully replicate its success from one city to the other. If it begins to falter in its plans then you will lose a lot of money.

Cyclicals are companies that move with the cycle of the business, which may include tyre, auto and steel companies. Their business expands and contracts according to the business cycles.

You can lose a great deal of money if you enter at the wrong end of the cycle and could also gain a lot of money if you enter at the bottom of a cycle. It is much easier to predict an upturn in a cyclical industry than a downturn.

Turnarounds- Sometimes the companies go into loss and are battered when they remain at loss.

When they work out a restructuring plan, they can come out of loss. But if you invest in a company in loss and if it doesn’t come back you may lose the entire capital. If the company comes back to profit again you can gain a large amount of money and the stock can become a multibagger.

14)Check the dividend Yield

Check how much dividend the stock is giving. Some companies give very less dividend but they plough the cash back into the business resulting in the rise in the price of the stock over time.

15)Check the debt of the company

Check the balance sheet of the company. In this, you should be able to find out the debt of the company. It is the debt which decides which company would go bankrupt and which would survive in a crisis.

The other thing to check is the cash available on the balance sheet. This can be used for acquisitions in the future or even for the purpose of buybacks. If there is more cash the dividend amount too can be increased.

16) Find the book value

Look at the book value. This is the amount the shareholders can expect to get if a company goes into liquidation.

17) Check the P.E. ratio

The stock price depends on earning per share and the P.E. ratio. If the P.E. ratio during purchase is too high the stock would not move greatly even with the increase in profits.

18) Buy some stocks in the niche sector

It is always better to buy a few stocks in the niche sector or companies where the competition is always less. This way there is very less pressure for cut-throat pricing.

19)Do regular research

Always devote at least an hour every week to research. Also, check the results of the company every quarter.

20)Number of stocks to hold

Now we come to a commonly discussed topic. How many stocks we should keep in our portfolio. I would say spread the risk to around 30 companies. Since I had many small caps in my portfolio during this recession and coronavirus pandemic, I spread the investment to 40 stocks as I was not sure how many companies would be affected and close down due to recession.

It is up to us, how many companies we should invest so that we can comfortably track them.

When to sell a stock:

21) When the fundamentals of a company are continuously deteriorating and it is running in losses for some quarters.

22) In a cyclical industry when the inventory is building up and a company is not able to sell its products.

23)There is an increase in competition and everyone is cutting prices to survive.

24)If the P/E ratio in a high growth industry reaches an absurd level.

These are some of the lessons that I learnt, investing in the stock markets over many years. I must agree that I have been a slow learner, but still, I am happy that I have come nearer to the journey plan which I have always desired. One is never perfect and always keeps learning. Even today I am a student in the stock markets and my journey is still continuing.

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DEEPAK SETHI

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