Monday, August 11, 2008

THE ART OF INVESTING

In my last post I had discussed the fundamental factors which an investor looks at in choosing a stock for investment. Apart from these an investor would do well to look at some intangibles which one cannot quantify in numbers, but play an equally important part in an investment decision. This theory was first propounded by Philip Fisher and further by Peter Lynch. Some of the factors to look at are:

  1. How well the company's products are being received in the markets. This can be gauged by visiting some of its retail outlets or talking to retailers and dealers which stock the company's products. This can be useful in determining whether there is a strong brand loyalty which could prove invaluable in case the industry, in which the business operates, faces a downturn.
  2. The R & D being carried out by the company. The annual report of the company gives the amount spent by it on R & D. Investors need to find out what percentage of sales is invested in R & D and also whether it is giving results. In case of Pharmaceutical companies, discovery of new drug molecules or new drug delivery mechanisms could herald huge future profits. In other cases investors could look at changes in products developed by the company and whether it is being innovative in introducing newer products or alternate packaging and if the company is keeping pace with competitors new launches.
  3. Goodwill of the business among stake holders. Investors need to see whether the company is fair in its dealings with suppliers, dealers, employees and consumers and minority shareholders. Some businesses do extremely well on the financials, but are known for shady dealings and have a poor reputation in the markets. Investors would do well to stay away from such companies because the integrity of the management itself is suspect and therefore the excellent figures being reported may be manipulated.
  4. Scalability of the business. Investors should look at the line of business and determine whether it holds the potential to scale up in terms of volumes. If, for instance, a business has excellent financials and scores well on other factors, but the nature of the business is such that it has a limited potential for expansion due to the fact that the market for its products is not very large, then investors would do well to not invest in the stock.
  5. Board of Directors of the company. This could provide an important clue as to the authenticity of the published figures. If the company has eminent public figures on its board of directors, an investor is reassured that the probability of accounting jugglery is minimal.

A company may be assessed on the above factors by studying its annual report, talking to various stakeholders like its suppliers, retailers and employees. An important source of information would be the ex-employees of the organization who would be more willing to give out factual details. If a detailed examination is conducted based on the above factors coupled with the financials, the probability of losses for an investor would be low and could yield multi baggers in the long run.

 

3 comments:

Uma said...

wow good post on how to research a company. customers & employees of the company always know well where it stands. Keep em coming!
Happy Independence Day Mahendra and best wishes for rakshabandhan tomorrow!

Mahendra Naik said...

Hi Uma,

Thanks for your comments and wishes.

Wish you too a great rakshabandhan.

VALUE STOCKS UNDER TWO DOLLARS said...

Investing is both an art and a science.