What should be my first stock ?

Last sunday, I met a friend and the conversation went some thing like this.
Friend: Krishna, last year when I asked you to suggest one good fund as my First
equity mutual fund, you suggested me to go with balance fund and chosen HDFC Pr
udence. It is performing amazingly well. I am sitting on a return of nearly 29%.
Thanks for it.
Me: Welcome. But actually, the major chunk of your credit must go to Modi mania,
another major portion to Prasanth Jain's conviction and only a decimal fraction
of it should come to me.
Friend: Now I want to come to direct equities. Can you suggest me one good stock
to buy right now ?
Me: NO. Believe me, this is the best suggestion I can give you (atleast for now)
.
Friend: If we have a direct answer for Equity Mutual fund like newbies must star
t SIP in a balanced fund. Why can't we have the same case with Direct Equities ?
This amazing question from my friend triggered me to write this post.
No, we can't have a direct answer for this. If someone gave an instant answer to
this question, run away from him after a punch on this face :)
Because, the thought process will be different for Mutual Funds and Direct equit
ies. How ?
In mutual funds we select an already built-in portfolio managed by well skilled
fund manager and his research team. Where as, in Direct equities you should sele
ct a company which you want to own (partially or fully should not make any diffe
rence) and you alone is the team (Scary isn't ?).
Interestingly investors, if they wear the hat of "Debt fund", there investment t
enure increases to more than 7 years. And with "Mutual Fund" hat they say 5 year
s minimum. But with "Stocks", they say Buy fast sell Faster !!!
Let's take a scenario, you went for a coffee break in your office and have seen
that the canteen is already full. You have to wait for 5 minutes, just to place
the order of chai and samosa. No empty chairs even to sit. Then you might think
of "He is running a profitable business, when ever I come here, it is full. Wish
I had same kind of shop as my side income". Did this ever happen to you ? Well
it happened with me.
Now, do you see any LED screen above the shop that displays the value of the bus
iness second by second. Do you ? No.
But when it comes to valuing Infosys, Tata Motors, HUL we do it second by second
, minute by minute. Just that BSE and NSE provides it every second, we are not o
bliged to watch it or even consider it. (Chapter 8 of The Intelligent Investor)
The quote which I recently read " The right thing for an investor to love is the
process of investing, not the bet itself. The right process for an investor is
to understand the value generated by the underlying business."
But does that mean that we should never start investing in direct equities ? NO.
There is a process associated to it (the process I believe in, may or may not b
e true)
Remember baby steps of your children, nephew or niece. And after few years they
start walking with little help and finally will stand on there OWN.
That's exactly should be the process.
1) Start small. Your equity portfolio in the initial year should not increase m
ore than 5% of your entire portfolio. If your total portfolio is of worth one la
kh, then allocate not be more than 5000 in the first year. This small amount you
have invested is not to Earn but to Learn from the markets.
2) Choose your area of competence. If you work for a Pharma company, IT company
or automobile company or your father works for a bank. Any business which you th
ink that is easily understandable. Pick that up (Intially, prefer large caps).
3) Learn reading Financial statements yourself. Yes, it's not a tough task as it
looks from outside. We have many learning videos and books avilable online. Par
allely keep a track of your stock.
4) Once quaterly results are out, try to look at it. Compare with previous quate
rs. List down what change in the numbers you observe ? What is the % increase in
Sales, What is D/E ratio, What is current ROE, How much has the OPM increased e
tc etc. Answer it to yourself.
5) Continue the process of learning and reading the best books in the feild of I
nvesting.
6) Calculate the intrinsic value of the stock and make the first buy as close as
it can be to that value (Remember 5% of portfolio should be the cap)
7) This is a long term process and needs patience.
Take ideas from others, but before acting on it do proper analysis and invest on
ly if you are comfortable.
I will give you my own example, for the investors who already read "The Thoughtf
ul Investor" knows that Page Industries is the darling stock of Basant Maheswari
sir and without second thought we can say it has given stupendous returns in th
e past 6 years. BM said his last purchase was at 5600 and says still many more y
ears of juice is left within it. With such golden words from a stock visionary l
ike him, it shall be taken for granted and stocks should be bought without any d
elay of a second. But, I couldn't act like that. Somewhere inside my mind anothe
r stock market gaint Parag Parikh sir came and asked me "What have you learnt fr
om my books and videos ? This particular stock is contradicting all my teachings
and my experience of 30 years in the market."
Then, I re-read "Value Investing and Behaviour Finance" (not all but few chapter
s), done some valuation analysis and took a call "This is NOT for me".
That doesn't mean I am right. I may be utterly wrong and the stock can go 50 tim
es in future. But it is not fiting in my learnings, so I didn't acted on it.
(I may look like a fool to go short on Page, but it is OK for me :))
Finally you need "passion" to own great businesses like ITC, Colgate, HUL, Asian
Paints, Pidilite, Gruh Finance and many more for years together (money will jus
t follow), and you need "Greed" to make more money in short term and loose it al
l in one bad trade. This will not happen if you "Learn youself" (Quote from my f
avorite professor in IIIT-B)
" It is better to be a mile deep in understanding handful of companies than an i
nch deep on many more."
"When someone confronted with a stock without reseach, imagine them holding a me
gaphone at the circus and then think about what they are saying."
"First Buy, Later know about the stock", may work some times, but it fails most
of the times without mercy."
Hence the reason I didn't answered you my friend :)
P:S Learning from others mistakes will be the best option as we can't do all the
mistakes on owr own. Recently I came across an amazing thread in my favorite fa
cebook group "Asan Ideas for wealth". Here is the link. I strongly suggest you t
o be a part of the group.
https://www.facebook.com/groups/asanideasforwealth/permalink/649247195146177/