Today, you can pick around 1,900 stocks on the NSE.
And around 4,100 stocks on the BSE.
And holy smokes, that’s a lot of stocks!
Because you see, in value investing, you’ve got to spend a while on each stock you study.
So, given the mountain of stocks in front of you, how do you fit all of this, in your spare time?
Today, I’ll show you exactly how.
Step by step.
As they say, well begun is half done.
So, before you begin, ask yourself these two questions:
1. How much workload can you handle?
If you’re pressed for time and can’t handle much, then start with the BSE Sensex (30 stocks).
But, if you can handle a mild workload, pick the BSE 100 instead.
And, if you can go full steam, start with the BSE 500.
And so on…
2. What is your hunger for risk?
If you wish to stick only to the prominent Indian companies, begin with the BSE Sensex, or the BSE 100.
But, if you’re game for some adventure, and want to hunt for hidden bargains, then you can pick up the BSE mid cap index as your starting point.
Or, maybe the BSE small cap index.
Now, let’s say you start with the BSE Sensex.
These are the stocks you’ll have:
- Asian Paints
- Axis Bank
- Bajaj Auto
- Bajaj Finance
- Bharti Airtel
- Coal India
- HCL Tech
- HDFC Bank
- Hero MotoCorp
- ICICI Bank
- IndusInd Bank
- Kotak Mahindra
- Maruti Suzuki
- Power Grid
- Reliance Industries
- Sun Pharma
- Tata Motors
- Tata Steel
- Yes Bank
So, with this list of 30 stocks, here’s what to do next:
What I’m about to tell you, is the single most powerful choice you can ever make in investing.
And it is this:
KNOW YOURSELF. AND THEN, BE TRUE TO YOURSELF.
There are many technical pieces to the value investing puzzle. Accounting. Financial statement analysis. Qualitative understanding. Valuation.
But none of them are as important as self-knowledge. Truly, truly knowing yourself.
Now, it might sound simple. And trivial.
But trust me, it is neither.
In fact, here’s what Warren Buffett himself said in his letter to shareholders in 1996:
“What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
And then again in his letter to shareholders in 1999:
“If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter…We just stick with what we understand.”
So, what should you take out of all this?
The next time you feel overwhelmed from having to choose from more than 4,000 stocks — realize that you actually have to deeply study only a few of those.
That’s right – only a few selected stocks.
But here’s the rub: Once, you do select your shortlist of stocks, you must then devote your full time and attention to it.
“That’s fine,” you say. “But give me something more concrete. How do I actually apply all this right here, for value investing in India?”
You now have an initial pool of 30 stocks (BSE Sensex).
And you now know, the secret in value investing is to select on the basis of your strengths and weaknesses.
Here’s what you do next:
Create a set of filters or tests, on which you’ll judge each of these stocks.
“Explain that,” you say?
Well, here are some practical tips:
Filter 1. Do you understand what your company does?
I mean, can you clearly describe the products and services, it sells?
Also, can you explain, in simple terms, how the firm actually makes money?
You know, the business model.
If you can’t, because it’s all too complex, you can go ahead and reject the stock.