Stock Advisor

The Value Research way

How to (and how not to) create wealth by investing in stocks

How to (and how not to) create wealth by investing in stocks

This month, on this regular space where I talk about our Stock Advisor service, I would like to talk about the investment philosophy of the service. What would you say is the right investment philosophy for the service? I know that most of you will have the simplest-possible answer, which is 'MONEY'. This is undoubtedly true and that's the goal. The service exists to help you make more money. In fact, the right term is not just to make money but to build wealth that can make a difference to your life. The real question is how you can make sure that you can use it to do that.

Our philosophy is simple: buy and hold stocks of high-quality businesses for a long time. A long time is defined as years or, eventually, even decades. Really, that's all there is to it. Obviously, some principles need to be followed. Let's look at these because this is what I call 'The Value Research way', without which even the greatest stock selection will not do the job.

This is the way

  • Invest in at least 20 to 30 stocks that we recommend: Diversification remains the cornerstone of a well-constructed portfolio. Holding a small number of stocks, no matter how well-chosen, does not work. You should start with our 'Best Buys' stocks and build from there over time.
  • Plan on holding any stock for many years: 'Many' sounds like an ill-defined term but the idea is central to our philosophy. Unless you need the money, there is no reason to sell a stock as long as everything is fine with the business. We don't believe in the target-price method, in which traders sell a stock as soon as a price target is met. There is no time limit or price limit to a good stock.
  • Don't stop - regular investing creates wealth: Invest regularly, ideally every month. There might be phases when new investments are not feasible but the normal mode of a long-term investor should always be investing. Regular investing over the years is what leads to a huge build-up over the years.
  • Keep the winners: One of the worst things that investors do is to have the 'profit-booking' mentality. This lures them into getting rid of their best stocks instead of letting them go on making money. In our recommendations, a great example is Divi's Labs. We recommended this stock when it was at Rs 827, then again at Rs 1,669, and then again at Rs 3,393. Investors with the profit-booking mentality got out long ago - they missed out on the wealth creation but our members did not.
  • Stay invested in market lows: Our philosophy is clear - as long as the fundamentals of a stock are sound, there is no need to sell it, no matter how bad the markets are and how low the price goes. Stock markets are not fixed-line investments. There will be declines of 5, 10 or 20 per cent. As history shows, there will even be 40 or 50 per cent declines once in a long while. The ability to not panic in bad times is the key to building wealth.

And now, to complete this little philosophy lesson, let's look at the opposite side of all this.

This is not the way

  • Stocks are great but not for all your money: Most Indians don't invest anything in stocks but the ones who do often invest too much. The money you will likely need for the next two to four years should be in fixed-income avenues, including appropriate mutual funds. Basic personal finance principles - including adequate insurance and emergency funds - always apply no matter how good you are at equity investing.
  • Don't concentrate: When investors first hear of a stock and they like it, they tend to mentally ignore all risks. This inevitably leads to too much concentration. This could take the form of having five to seven stocks or lots of stocks but still being concentrated in only a few. For Stock Advisor members, our free Portfolio Analysis tools help avoid concentration.
  • Ignore short-term gains: Stock prices swing around all the time, sometimes by large amounts. Looking at your gains and losses continuously is counterproductive. You are not in this game for a few months or even one or two years.
  • Don't leverage, ever: Investing with borrowed money is the most dangerous thing possible. Note that this does not just mean taking a loan but also trading on the margin-based funding that market intermediaries provide. I said above that you should not have too much of your money in stocks. However, people who borrow and invest can actually have an equity exposure of greater than 100 per cent! They are the ones who get wiped out and go bankrupt when markets crash.
  • Don't expect all your stocks to go up: No matter how well you choose, some stocks will lose money. In the Stock Advisor service, we have made 66 unique recommendations over the years but eight stocks have turned out to be losers that we have de-recommended. This is why diversification is a must.

These are the dos and don'ts that add up to our investing philosophy. Or rather, what we hope will be your philosophy and here's a brief recap of what you will actually get:

  • Access to all our (currently 57) stock picks
  • Best Buy Stocks: 13 stocks selected from our recommendations. Use this set to start building your portfolio right away!
  • The complete investment thesis for all recommended stocks so that you understand why you are investing
  • New recommendations as soon as they are released
  • Continuous updates and analysis on all recommended stocks straight from our dedicated analyst team
  • Tools and data to research and analyse any other stock

To begin on this path, head over to Value Research Stock Advisor, read the details and become a member. Right now, there are discounts of 40 to 60 per cent on the full membership price, so don't miss the opportunity.

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