How does good research make a world difference in creating wealth for you?

How does good research make a world difference in creating wealth for you How does good research make a world difference in creating wealth for you?

You must have heard the popular piece of wisdom that “good markets don’t earn returns; good companies do”. If you want to create wealth in the stock markets, don’t obsess with bull and bear markets. The stock market indices have their own peculiar logic which you can neither defy nor define. It is therefore best to focus on what you have the most control over.

In a nutshell, what you really have control over is your trading or investing strategy. Let us take an example. In the last one year, the Nifty has not gone anywhere. In fact, the Sensex touched 40,000 in October last year and has since struggled to break above that level with any degree of conviction. However, during the same period a stock like Adani Green Energy has moved from Rs.40 to Rs.600. That is a 15-bagger when the indices have not gone anywhere. The moral of the story is that if you want to create wealth, focus on researching good companies. That is the mantra to wealth creation. But how do you go about?

7 steps to wealth creation Nirvana

Creating wealth in the equity market is about 7 essential steps. Let us enumerate them as under:

  1. Zero in on the list of stocks that you want to invest in. The trigger can be any news which you think could be a game changer for the stock.

  1. Research the business strategy. You only make money on a stock that has a new product or a new solution to the old problem. Rest of them are market performers.

  1. Research the financials. A company has to be growing but it also has to be profitable. The most important thing is it must have profitable customers.

  1. Research how it is rewarding capital. When you invest money in a stock, the reward ratios like ROE, ROCE and ROA must be healthy. Otherwise there is no point.

  1. Check the solvency and liquidity. This includes checking that it can service leverage, it does not guzzle capital and that it funds working capital liabilities with current assets.

  1. Is the company generating actual cash? Look for simple triggers like advance taxes paid, dividends distributed, creditor days, debtor days etc. Real cash is what matters.

  1. Finally, look at margin of safety. A good stock at a bad price can still be a lousy investment. If you buy a great IT company at 150 P/E, you are not going to make money.

Once these seven steps are completed, you are good to go.

Solid companies at the right price for the long term

If someone asks you the essence of research, you can summarize in three aspects. Firstly, you need to buy companies that are solid quality companies. Secondly, even the best of companies have to be bought at the right price or a reasonable price. Finally, think like a long term investor. As Buffett says, our holding period is forever. Let us delve in detail.

  • Quality companies are a safe haven for long term investors. The history of markets is testimony to the fact that big money in the stock market over a long period of time is only made by investing in quality companies. You are looking at stocks as a weighing machine not as a slotting machine. Power of compounding works in your favour only when you invest in quality companies. This implies quality of business model, quality of customers and the quality of management of the company. Quality companies gain from good earnings and also from P/E expansion.

  • A good company at a bad price can never be a good investment. For example, if you had bought HCL Tech at the peak in 1999, it would have taken you nearly 16 years to even get back to break-even. This is notwithstanding the fact that HCL Tech was a quality company all through. That is why it is essential to buy quality companies at the right price. Investors often argue that quality companies are always at premium valuations. That is when you must wait for the right valuation. For example, buying HDFC Bank at 16X P/E makes a lot more sense than buying it at 32X P/E. Wait for your price.

  • Your focus must be on the long term. Wealth is built over years or even decades. A stock like Reliance Industries has given over 23% annualized returns over the last 40 years. That is what long term investing is all about. If we fixate our mind with a 20-25 years perspective, it drastically changes the way we buy and sell stocks.

If you want to create wealth for yourself, the answer lies in in-depth research. It is your hard-earned money, after all.

In modern world everything comes at tip of finger, even the research, but it costs. You can either do an in-depth research on your own or get it done by experts. To explore experts’ opinion click here

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