8 Questions to be asked before buying a stock for long-term.

Discussion in 'Must-Read Interviews, Articles & News Items' started by Kritesh Abhishek, Jul 15, 2017.

  1. Kritesh Abhishek

    Kritesh Abhishek Member

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    Hi. Today I'm sharing the stratergy that can be used by fundamental analysts to get consistent returns for long term. Here are the 8 steps (with questions to be answered first) before you select a stock to invest for long term in the stock market:

    1. Does the company have a good fundamentals?
    Here are few financial ratios and their trend that can help you to find a fundamentally strong company.
    • Earnings Per Share (EPS) – Increasing for last 5 years
    • Price to Earnings Ratio (P/E) – Low compared to companies in same sector
    • Price to Book Ratio (P/B) – Low compared companies in same sector
    • Debt to Equity Ratio – Should be less than 1
    • Return on Equity (ROE) – Should be greater than 20%
    • Price to Sales Ratio (P/S) – Smaller ratio (less than 1) is preferred
    • Current Ratio – Should be greater than 1
    • Dividend Yield – Increasing for the last 5 years
    These financial results, however, gives the past growth. You cannot decide whether the company will perform same or better in the future based on just past trends. Therefore, you need to consider other important factors which are discussed in next steps.

    2. Do you understand the products or services offered by the company?
    After filtering the companies according to their financial fundamentals, you need to investigate about the company. Understand the company first. Learn about it’s product and services. It’s important that the company is easy-to-understand and has a fairly straightforward business model.

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    3. Will people still be using this product or service in 15-20 years from now?
    Always look for a company with long life. Such companies have huge growth potential and thecompounding power of applies to such companies.

    4. Does the company have a low-cost durable competitive advantage?
    “In business, I look for economic castles protected by unbreachable ‘moats’.”
    -Warren Buffett


    Invest in companies with ‘MOAT’- This concept was popularized by Mr. Warren Buffet. A moat is a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack. Some stocks have a similar moat around them. That’s why it’s really tough for its competitors to defeat them in its sector.

    5. What isthe company doing that its competitors are not?
    Find the unique point selling of the company. Learn what this company is doing which it’s competitors are not.

    6. Does the company has low debt?
    Big debts in a company is same as big hole in the boat. If the hole in the boat is not filled soon, then it won’t be able to cross the long sea and will definitely sink. When you select a stock to invest in Indian stock market, read its financial documents carefully. Avoid the companies with big debts.

    7. Is the company’s management efficient and qualified?
    The management is the soul of the company. A good management can prosper the company to new heights. On the other hand, a bad management can lead to the downfall of the company. Hence, it’s really important to research carefully about the management of the company that you plan to invest in Indian stock market.

    8. Is the company constantly in news and overly popular?
    The stock market is based on the sentiments of the people. Consistent news affects the expectations and decisions of the public. Stocks, which are popular in news, can by inflated by the hype of the media. As people expects great results from such companies, even after giving good returns the stock prices of such companies falls. That’s why try to avoid buying stocks of such companies for easy returns. The hot stocks are subjected to market volatility and the boring stocks are the one, which gives the best returns.

    Also Read: 6 Reasons Why Most People Lose Money in Stock Market

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    That’s all! I hope the post is useful to the readers.In addition, if you want to read the complete post, you can find it here: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

    Further, what are your views about this stratergy?
     
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