9 golden rules of stock investing

All successful investors follow some rules and applying them in a disciplined manner, you will become rich in the future. To achieve this goal, you have to find the stocks that beats all market conditions like fluctuations etc, for long term. As an investor you should develop a rational strategy that works over the long-term. There are different types of strategy depends on investors. Legend investor Warren Buffett and Founder of Fidelity house Peter Lynch all have different strategies but that works fine.Below are some ideal rules that an investor can follow to build and apply there on better investment strategy to select a winning stock thus a successful portfolio.

Rule #1. Select company with higher Sales and a 30% year to year growth in sales.

High sales growth showing the quality of a companies product, service as well as its focus on business with better strategy. This type of companies certainly win in the future.

Rule #2 : Company must have a 30% year to year growth in profit after tax (TAX)

So your target businesses deliver on sales. Good. But sales growth must lead to higher profits. We are referring to profits after tax (PAT). Ideally, PAT should have outpaced the turnover growth through the past three years. If sales have grown at 30% or higher but PAT growth is slower, there is a problem with profit margins.

Rule #3 : Look for Return on Network 25% or more

RONW clearly showing how company utilizing its funds and how efficiently. One way to judge capital efficiency is to compare profits with net worth. Net worth is the sum of the equity capital and retained profits. This is often shown as “reserve net of revolution” in a company’s accounts. The percentage of PAT to net worth is referred to as the return of net worth (RNOW) or RoE (Return on Equity)Warren Buffett, the most successful stock market investor of all time, uses RNOW as the counterstone of financial analysis. He will not invest in a stock without being assured of consistent, high RNOW.A company with high debt burden may have a deceptively good RNOW. There are two common ways to control for high debt on the balance-sheet. One is to calculate the profits as a percentage of total capital employed. Other method is to compare the outstanding long-term debt to its equity.A low debt:equity ratio, along with a high RNOW is what an investor want to invest on the stock.

Rule # 4 : Consider Price to Earning (P/E) ratio and Dividend Yield to buy cheap

The most common measure of valuation is the ratio of price to the earnings per share. This is the PE ratio. A PE of 10 means that the price of a share is 10 times the profits its earns. High-growth companies often have very high PE.The PE tells us how low-priced stock may actually turn out to be expensiveOther than PE, a more conservative measure of value is the dividend yield, which is dividend per share as a percentage of its market price. (Dividend is reported on face value—not the market value—of shares and therefore looks more impressive than the yield). Most companies offer dividends—this is how promoters reward themselves.

Rule # 5 – Cheap stocks can be very expensive and high prices stocks have better value

This is a follow up to the previous rule about the differences between value and price. Penny stocks trading at very low prices are often very expensive.They usually have dubious financials and make losses. Quite often, managements are dishonest— many don’t even file financial reports.Speculators can charge in and out of low-priced stocks, causing huge swings in price and liquidity. If you’re caught on the wrong side of such moves, you may lose heavily. Or, you may gain big if you are on the right side.Of course, there is a counterargument in favor of small-cap investing. A small cap has more room to grow rapidly precisely due to its lack of size. It can double in size annually if the business is sound.During bull markets, small caps can also yield higher returns. Small cap investing is therefore the classic high risk versus high reward game.If you indulge, be prepared for occasional large losses

Rule #6 : Subscribe to IPOs only if you like betting on the toss of a coin

There’s an impression that an IPO allotment is like winning a lottery—it produces multiplied gains. Sure, many IPOs have created wealth,but in the end they are blind bets. Some IPOs will produce extraordinary gains. Others see listings lower than the offer price.Some great investors, including Warren Buffett, will not touch IPOs. They want years of listing and financial compliance before buying a business. Benjamin Graham in the canonical The Intelligent Investor says that it is elementary for an intelligent investor to resist the temptation of IPOs. Some key IPO themes:Far less is usually known about an IPO than about already-listed stocks. This raises the levels of risk for IPO investors.

Rule #7 : Don’t get emotionally invested. Set loss limits and stick to them

The worst losses occur when the investor takes a losing position and bleeds to death slowly. Ironically, this more often happens with good businesses than bad ones.Always set a personal loss-limit and sell if that limit is hit. It helps to translate the loss limit into the maximum-loss sessions.

Rule #8 : Don’t under or over diversify.

Bill Gates made his fortune with one stock— that of his own company, Microsoft. Peter Lynch held up to 200 stocks at a time as a successful fund manager.These are extreme examples of two types of investors if we stretch definitions slightly. Gates, of course, was actually an entrepreneur.As a fund manager, Lynch deployed so much money he was forced to buy pretty much any profitable listing at reasonable price.Most investors are more diversified than Gates and much less so than Lynch.There are practical difficulties in tracking more than a few stocks. If you don’t bother to keep track however, you may end up holding a huge portfolio before you realise it.Let’s start with the obvious. Any given stock can give returns from anywhere between 99% down to 10,000% up. Any randomly chosen set of 200 stocks is quite likely to deliver returns that are close to the market index.Lynch’s track record is extraordinary because he managed to consistently beat Wall Street despite being forced to hold so many stocks.At least two Nobel prizes have been won by economists specialising in portfolio theory. They used complicated mathematics to prove the following insight: If you buy very few stocks, your returns may fluctuate a lot.If you buy too many, you may as well save yourself the bother and invest in an index fund instead since your return will be close to the index.Portfolio theorists investigate stocks to discover how closely correlated the movements are with other stocks and with the indices.A sophisticated trader can use these relationships to create a portfolio, which hedges against adverse events such as a currency crash or a jump in crude prices.These are not primary concerns for retail investors. The key is to ensure that the portfolio is diversified enough to provide stability while not so diversified that the returns are average.

Rule #9 : Returns rise if you hold for the long term.

In the short-term, the market is a polling booth, in the longterm it’s a weighing machine. You’ve found a stock that conforms to your rules. You’ve set your stop losses and–nothing happens.Your portfolio goes nowhere. Sit on your hands and wait. These rules yield results only in the long-term.Don’t expect investments to start generating returns within the hour or the week.Give some time depending on your liquidity requirements.” You should not deploying either borrowed funds or even the housekeeping cash in stocks picked using these rules.Traders often under-perform long-term investors due to brokerage costs. Cut your losses when you must but “let the losers go and let the winners run”.

This article originally taken from www.moneytoday.co.in

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