Moneylife Events
How to Select Stocks for Building Long Term Wealth

A Moneylife Foundation event hosted in Pune focussed on how one can grow his wealth by picking the right stocks

 

Moneylife Foundation hosted an exclusive event for its members in Pune on investing in stocks. The event titled “Stocks for Building Long Term Wealth” included two sessions. In the first session, Debashis Basu, editor and publisher of Moneylife, explained major differences between stocks and mutual funds. In the second session, R Balakrishnan, a regular columnist for Moneylife, educated the audience on how to pick the right stocks.
 

Investors are always riddled with the question whether they should invest directly through stocks or through an equity mutual fund. Mr Basu, in his session explained that though equity funds offer a diversified portfolio, in principle they as similar to holding individual stocks. Both are volatile and can fall sharply leading to a loss of capital, he said. Those who have no time and interest to analyse individual stocks should go for equity funds. Equity funds would be ideal for those who are just beginning to invest and are looking to invest small amounts.
 
Certain investors do have a misconception about equity funds, as they offer different themes, professional fund management and liquidity. However, with over 300 equity fund schemes available, the risk of choosing a wrong equity fund is just the same as picking a wrong stock from a basket of 300-odd quality stocks, Mr Basu added. 
 
He said, “Stocks score over equity funds in terms of costs. Costs eat in to an equity fund returns. Equity fund charge an expense ratio, which is their fees in terms of a percentage of the corpus they manage. This is deducted from the corpus on a daily basis. The fees charged can range between 1.25% and 3% per year. In percentage terms, it may seem very low, but as your corpus grows, you are paying higher fees in percentage terms and the costs for holding stocks remains fixed and transactions costs are low as compared to equity funds.”
 
In terms of stock selection too, equity funds are not very efficient, Mr Basu said, adding, they (funds) stick to the same basket of stocks and are heavily weighted to their benchmark index stocks. Most equity funds have the same stocks in their portfolio. Mr Basu gave an example how nearly 86 of the 200-odd actively managed schemes hold Reliance in their portfolio. The main reason for holding this stock is because it is a heavy weight on the index.
 
To win at stock picking, Mr Basu said that one should pick good quality stocks and hold them for the long term. 
 
Mr Balakrishnan explained how to pick such stocks in the next session.
 
The average investor has no clue about what he is buying or selling. S/he survives in the stock market mainly because of luck. The ones who do survive may have done so because of some skill or just luck. Mr Balakrishnan, who has over three decades of experience across banking, credit and capital markets, explained to the packed audience on how one should drown out the noise and evaluate a company using by crunching a few numbers. 
 
He pointed out that when an investor buys a stock, s/he becomes a part owner of the company. One should understand the business of the company, the sustainability of growth over the next five years or so. To be on the safer side, one should pick companies, which have a history of more than 10 years, over which at least one business cycle is complete.
 
More importantly, the investor should look at the company’s management, whether the goal of the promoter aligns itself with the goals of the shareholder. “Look at the nature of companies, the trustworthiness and goodwill of promoters along with cash flows and future of business the companies have,” advised Mr Balakrishnan.
 
He said, “An average investor has generally no clue about what he is buying or selling. His long-term investments or holdings are often an outcome of a short-term trade he initiated which went bad. He simply hates to sell below the price at which he bought.” 
 
Using a detailed spreadsheet, Mr Balakrishnan explained how one can analyse the profit and loss account and the balance sheet of a company. To analyse such data, he said, one needs to divide it into three groups, earnings, the assets & liabilities and the cash flow. He also, pointed out that while short-listing companies, two most important ratios one should look at is the return on capital employed (RoCE) and return on equity, also know as return on net worth (RoNW).
 
For those who dread numbers, Mr Balakrishnan says, “If you cannot go too deep in to the accounts, you should stay focused at least on one thing, namely, management quality. To me, the quality of management is perhaps the single most important factor in an analysis. Ultimately, when we buy a share, we are becoming a part-owner of the business that is run by someone. We are dependent on them to deliver. However good a business or industry, it cannot be better than the people at the helm.”
 
“Invest in stocks only if you have money to spare,” cautioned Mr Balakrishnan. “Don’t invest in stocks with money which is very important for you, to use it for a child’s education or marriage. In that case, don’t risk your hard earned money in stocks, keep it safe even though may earn lower returns on it”. 
 
Also, remember when investing in stocks, Mr Balakrishnan said, “Returns may not come when you want it. Stock prices are decided by many factors none of which controlled by us.”
 
“If you wish to invest in stocks you should devote at least an hour a week to understand the business of the company and the financial statements,” he said. 
 
The programme ended with a lively interaction with the audience.
 

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COMMENTS

kothapalli srinivasu

2 years ago

good job thanks to money life

Akshat Agarwal

2 years ago

Will a youtube video be posted of the event ?

Opposition unites to put government on backfoot

After the NDA's victory and the complete decimation of the UPA-II in the 2014 polls, the Opposition was stunned into inaction

 

The Modi government's first year in office and its brute majority has spurred the Opposition on instead of crushing it. Increasingly, the ruling party has been put on the mat over various issues. In recent months, the move to pass the land acquisition bill has also backfired for the government.
 
After the NDA's victory and the complete decimation of the UPA-II in the 2014 polls, the Opposition was stunned into inaction. However, it recovered quickly and set about initiating a process of transformation. Most major Opposition parties, including the Congress and the Janata Parivar, have re-invented themselves and modified their approach to take on the Modi juggernaut.
 
"The Opposition is co-ordinating its actions not only in Parliament, but also in the state assemblies," Rajeev Shukla, Congress Rajya Sabha member and the party's floor manager in Parliament when the UPA-II was in power, told IANS.
 
He, however, credited PM Narendra Modi for galvanising the Opposition into a unified force.
 
"Modi has managed to be very unpopular in his first year in power. He made many promises and could not fulfill them. He had made promises without considering the practical reality. Most of his policies are those which Manmohan Singh was pursuing," Shukla added.
 
He said that "farmers are unhappy and most businessmen, except some, are also unhappy" with the current government.
 
The Opposition unity was especially on display when almost all parties came together to protest against the land acquisition bill outside Parliament at the beginning of the just-concluded budget session. Congress president Sonia Gandhi led a rally against the bill to Rashtrapati Bhavan.
 
Mohammed Salim, a new entrant to the CPI-M politburo, however, differed from the perception that the consolidation of forces by the Opposition had anything to do with Modi and his stupendous electoral victory.
 
"We have been trying to come together on the basis of secular ideals for the past 30 years," Salim told IANS.
 
The renewed efforts by the Left parties at floor management - even with bitter rivals like the Trinamool Congress - points to this effort to consolidate the Opposition.
 
"The floor management of the Opposition is better than that of the NDA. And outside also there should be more consolidation of Opposition on similar issues," Salim said.
 
The all-round disappointment with the Modi government is also making the Opposition take up causes together, he said.
 
"The government has been on the defensive on a lot of issues and the land bill is the major one," Salim added.
 
Smaller parties like offshoots of the erstwhile Janata Party/Janata Dal are, on their part, are trying to maintain their relevance by coming together.
 
Six parties with socialist roots have announced that they are merging to form a single party headed by Samajwadi Party chief Mulayam Singh Yadav.
 
The six - the Samajwadi Party, the JD-U, the Rashtriya Janata Dal, Janata Dal-Secular, the Indian National Lok Dal and the Samajwadi Janata Party - are expected to come together on a common platform before the Bihar elections later this year.
 
"The process of all Janata parties coming together will be finalised very soon," JD-U leader K.C. Tyagi told IANS.
 
"We welcome Rahul Gandhi's activism and Sitaram Yechury's elevation as the CPI-M general secretary. The Modi government is from now on going to face a very united opposition," asserted Tyagi.

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Bengaluru maid wants to dream big after scoring 85 percent

The Karnataka Examination Authority declared the PUC results on May 18 for the exams held in March across the state

 

Seventeen-year-old Shalini, who doubles up as a housemaid to support her family, has found a solid reason to dream big. She recently appeared in the two-year pre-university course (PUC) board exam and scored an impressive 85 percent.
 
"My hard work has paid off. I used to study for final exams whenever I was free from work as maid in five-six homes around the neighbourhood and household chores," a gritty Shalini told IANS at her small rented home in the city's western suburb.
 
The Karnataka Examination Authority declared the PUC results on May 18 for the exams held in March across the state.
 
Though distinction was not knew to this only daughter of a poor family, as she scored 86 percent in 10th class board exam two years ago, it is her ability to repeat the feat despite adversity that inspires.
 
While preparing for her exams, she also looked after an ailing father Armugam, bed-ridden since falling from a building over a decade ago, and younger brother Surya, who is undergoing treatment at a state-run hospital for blood cancer.
 
"As my mother (Vijay) is the only earning member and works as a domestic help in dozen homes, I used assist her and learn washing utensils and clothes, sweeping and mopping floors and sprinkle water in front of houses to draw rangoli (colours). 
 
Later, she also took up the same work at some houses to add to the family's income.
 
Having studied in Tamil medium up to seventh class, eighth and ninth class in Kannada medium, Shalini switched over to English medium in 10th class. She wrote the exams in English with ease from Vivekvardhani School.
 
"Tamil is my mother tongue and Kannada is the local language. I opted for English in 10th class to do PUC and degree in the same language," Shalini shared in flawless English.
 
A shy and reserved ward, Shalini surprised even those for whom she worked as a domestic help.
 
"They (owners) were delighted to see me talking about my performance in PUC on news channels and read about me in some newspapers with my phone. They wondered how I managed to study so well while doing maid work in their homes," Shalini said.
 
Unfazed by social and economic hardships, Shalini now wants to graduate in electronics and communications and become a software engineer in an Indian IT bellwether or a multi-national in this tech hub.
 
"I am waiting for CET (common entrance test) results so that I can join a reputed engineering college like BMS, BNM or VIET in the city with support from trusts, scholarships and donation from charitable institutions," Shalini said.
 
Recognising Shalini's talent and hard work, the Mysore-based Swami Vivekananda Youth Movement paid her admission and tuition fee in the Sri Gururaj Parents and Teachers Association Pre-University College in the city's southern suburb. It was a reward for passing the SSLC board exam with distinction.
 
"The trust also paid for my annual bus pass and books. I hope to get similar financial assistance from others to study engineering if I don't get scholarship, as my family cannot afford to pay the exorbitant fee in a degree college," Shalini said.
 
Admitting that it would be a tough call to juggle studies and work as a domestic help at the degree level, Shalini said she has no choice but to keep sharing her mother's burden. 
 
She knows her family has no health insurance or any other source of income to pay for father's and brother's treatment and meet house expenses.
 
"Living in a costly city like Bengaluru has been a struggle, as we don't have property or assets," said Shalini, adding: "But I have learnt to face troubles and cope with pressures to excel," Shalini added.

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