Wednesday, March 10, 2010

Make a note...

"I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that. "I'm paying $32 billion today for the Coca Cola Company because..." If you can't answer that question, you shouldn't buy it. If you can answer that question, and you do it a few times, you'll make a lot of money." - Warren Buffet

The above quote is again one of my favorite and I follow this practice with a full spirit for myself as well as for my clients. I think, this citation is not only restricted for selecting stock, but having a good or bad reason for the whole things to do in life is better and it will certainly make things easier in the long run. Recording the reason(s) on your decisions to have a stock is well again for a later review. But the most important thing is; the justification against each stock should be a self persuaded one developed after logical thinking rather made on external influences.

Well, What all the points you are going to note down in that piece of paper? I wish to discuss on few in that kind today, which may helpful to those who wish to invest in equities in a disciplined manner. All these points are discussed a lot by experts, but I wish to refresh again for my readers. Simply, you have to filter out better stocks to invest, but with minimum solid self-convinced reasons, why should I buy this stock? This topic is in continuous with the posts earlier in this row and hope new readers will make a look on existing related articles.

Performance History

History is the basic observable fact in any case, if accessible; even it is prone to deviate. But it is a solid base to affirm your believes on any case. I usually give out a 40% credence to the history while make my mind up on any stock before invest/recommend. You have to consider the performance records of the company and it should be at the minimum satisfactory level. The average CAGR of 4-5 years should be 20% at minimum is a tangible reason to trust a business. The constant raise in the CAGR proportion in every consecutive years can be one of the best reasons to pick that scrip to invest. The yearly performances as well as quarterly results should be in a healthy flow which may not only protect your hard earned money, but will flourish. Continuous negative result figures in 2 to 3 quarters may bring the selling pressure on stock and can bring down the prices. I can explain this topic far and wide with further 10 more pages, but he blocked my chances in just less than 10 simple words.

Growth in Sales

An average growth of 20-25% in sales during 2 to 3 consecutive years is a good symptom to enlist a stock. The net profit figures should also in the continuous upward trend. You can give a bit relaxation to this for the periods of recession turmoil, because the performances affected by global cues rather than fundamental issues. You should also aware about the product/service range of the company, its reliability, customers, competitive products in the market, marketing strategies, other focusing areas etc...

Promoter’s holding

You should be well verse with the share holding pattern of the company before investing in any scrip. Holding a good percentage by the promoter is a positive symbol in most of the cases. We can generally interprets like the fundamentals are strong and the entrepreneurs have good faith in their own business. A sudden or gradual decrease of promoter’s holding is an alarming edge and you have to be very cautious on buying or holding such stocks. If a promoter increasing their holding especially from the secondary market will probably boost the share prices. You can get this information in almost every sites related to market as well as in the sites of major exchanges.


The Dividend factor is also a good symbol to notice while screening stocks. It is the part of company’s profit and it simply shows the growth of the company. The increasing dividend rate is a good cause to choose a company. But on the other side the declining dividend is a subject to rethink and shows the shrinking business.


Generally, companies headed by professionals other than families will perform better. It is one of the important points to note as the professionals are more accountable to perform because they are professionals or certified or experienced specialists (I am not neglecting the odds). Our money may more safe in their hands than the traditional bosses. Family businesses are highly prone to conflicts which are a regular story in Indian scenario. Heading or taking over by a renowned professional who have an excellent track record will positively work on the share prices. Probably their experience has to bring more brightness in the business. But you have to give adequate time to perform them. I usually weigh this point with priority, one of the main reasons to prefer Value Industries.

Business Diversifications

Extreme diversification by a company is an off-putting factor because very few can manage all these successfully for a long time. I am not neglecting TATA, Birla or Reliance people, but they are operating on an extensive and established networks with sufficient sources of fund. A company who skips their trivial business to focus their mainstream is a better strategy for stable growth and I will take it as a positive move. Cutting of glut branches will surely boom the growth of a tree. On the other side, If a company trying to acquire an untried business for a survival and projecting as a diversification will demoralize me.

Let me conclude, If you are successful to bring these points in practice in a logically balanced manner or started to note such reasons against each stocks you are going to have, I am sure, things will change in a great way. As an investor, you have to think your own and try always to connect things sensibly. That will work better than 1000 experts’ analysis/predictions. Never reach in decisions as majority is doing the same. Never compromise with partial information, keep your search until what your sense is seeking for. Apply simple logics of real life as they are very much concurrent with the market.

You have to find time to read the annual reports by CEO/MD/Chairman which will give you a close insight on the company. You can map out the strengths, constraints as well as future strategies of the company by a dedicated reading. It is also your responsibility to verify the legitimacy of the facts you have gone through. Peoples who talk less with reliable statistics and feasible projects are always trustful as it in the real life. Bigger project plannings, unreasonable future strategies and guess works are normally to entice the investor community than to materialize. So read everything, but take what you can digest.

The time is still there to revamp. You can review your Portfolio to find such a healthier reason for each and every stock you are holding. If you found one or two, then write down somewhere and wait for the result, else you are going to be in real trouble. He says...

You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right—and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else

Comment please.....

Shabu Thachat -


  1. Shabu Sir..another nice article!!

    Very nicely you have given a way to use our commonsense before buying... :-)

    Thanks :)

  2. Sir,
    Our guru is right. We should have reasons to buy a stock. It is not possible to be right always. But it is possible for us to be right at most of the times. According to me we should also have idea of why the stock is trading at current valuation.

    I am also bullish on value ind and videocon. The management is trying to change its image from family run business to professionally run business. The new logo is an indication of change.

  3. Dear Venkat & James,

    Thanks for the inspiring comments. Keep reading and commenting.

  4. Dear Shabu, This post is very amazing. Though I have had the same idea of writing down things, I haven't done it yet. I will definitely start noting down why I buy any stock here after.


  5. Dear Madan,

    Thanks for your good words. I am sure, if our youngsters follow this procedure, it will change their life in a great manner. No one will search a bad reason to have a stock, and on the way of searching a good reasons you will surely accumulate immense of knowledge regarding the company/business. My experience says, the upper balancing of positive findings and a bit prophecy is the best combination to have a stock. Shortly, "knowledge is the power" in all respects.



The blog is associated with information on Indian stock market and author’s investment view points on various emerging stocks/sectors. The contents discussed in this blog are purely my own personal opinion and in no case weigh it as any kind of recommendation for stock market investment. The sheer purpose of this blog is to educate the interested community on market related subjects based on my experience and I am, in no way, responsible for investment decisions based on the contents described in this blog.

Total Pageviews