I understand that getting started in stocks is not an easy thing with so many experts giving a lot of conflicting advice to you. Some will tell you that you have no hopes of building a good portfolio unless you can understand all kinds of ratios and read Balance sheets like a CA does, others will tell you that going for direct stocks is akin to a horse race where anything you bet on is almost certainly going to lose. Yet others will chide you for thinking anything beyond Mutual funds. After all they are experts and invest only in MF with all kinds of complex strategies, who are you to even think otherwise?
While all of the above has very obvious counters, read my post on Why you must be in direct equity to satisfy yourself on the importance of being in stocks. Building a long term portfolio of direct stocks does take a lot of understanding of the economy, the industry and the business. You can get these only with experience and there is really no magic potion to make you an expert overnight. There is however, a way to get started on building a portfolio of stocks, while you gain this knowledge and experience over time. Is there a guarantee that you will not lose money if you follow my suggestion? Unfortunately not, but the chances of your losing money are indeed very slim.
Without further ado, let me give you the simple steps to what you need to do from scratch:-
- Choose the 5 sectors – Auto, Pharma, Banks, IT and FMCG. You can add other sectors at a later date.
- From each sector choose 2 market leaders. You can do it by their Market caps or the PE ratios. Honestly, it does not matter a great deal as to which method you are using as long as you are consistent in your approach.
- For people focused on names look at DRL, Cadilla, Lupin etc in Pharma. Tata Motors, Maruti, TVS Motors, M & M in Auto etc. SBI, ICICI, HDFC Bank in banks. TCS, HCL Tech, Infosys, Wipro in IT. HUL, ITC, Marico in FMCG.
- Decide on a comfortable amount that you can spend every quarter on stocks related investment. Set price triggers based on 200 DMA of the stock. For example, if the 200 DMA of a stock is 3000 and the current market price is 3200 then set the first price trigger at 3000 or just below it.
- Stick to this discipline and never go beyond 20 % of your quarterly money in one go. You are in no hurry, wait for the stock price to drop. In the next 6 months there will be many ups and downs. Buy only on downs, let the ups go by without bothering too much.
- In a quarter there are bound to be many more bad days than 5, you just need to be patient.
- Remember you are building a long term portfolio, so even if you miscalculate and buy at a higher price it does not matter too much. In 10 years the markets will be far higher than 11000 on the Nifty.
- Keep adding to each stock regularly, do not start chasing other stocks that seem to be doing better.
- Increase your quarterly allocation based on your surplus availability and your comfort level.
- Stick to this for 2 years, by then you will have enough knowledge to get to the next level of risk.
Stock investment is like swimming, you will not do it by reading how not to do it. Get started with it and you will see how things work out at a portfolio level – remember, it will never work out for all stocks that you invest in. Also, next time someone advises you on how to pick stocks, ask him about his portfolio and how successful he has been in his own stock portfolio performance. Trust only advisers who put their money where their mouth is.
I will do other more involved posts on stock picking but this one is good enough for all new investors to get started.