With the meteoric gravity-defying rise in the stock market in the past 15 months, perhaps more investors than ever before have an eye on the stock market. All of this is very evident from the huge surge, not only in the opening of new demat accounts but also from the jump in revenues of India's top brokerages.
Indian markets have mirrored their global counterparts, and despite a painful second wave of the COVID-19 pandemic, have soldiered on to create new highs. In several conversations in homes and offices across India, a big subject of discussion is the stock market and how it seems to be the one place where investors have really prospered during what has otherwise been a challenging year. After all a bull streak that has extended this long is rare and I can't recall any instances in my almost 25 years of investing, that the run has been so good.
However as the old stock market saying goes, "Be fearful when everyone is greedy and be greedy when everyone is fearful" holds more true than ever before. I mean just look at the rise in YouTubers offering insane returns by subscribing to their "courses" and look at the views on their videos, it's mindboggling. This article however won't go down that path and is not about judgement on "experts" bringing in gullible investors into complex derivatives and crazy get rich schemes in the stock market.
Let's instead take a look at a new investor, perhaps a working professional, business owner or anyone for that matter who has been an investor in more conservative instruments like fixed deposits or even debt funds and is now venturing into the stock market for the first time. Well the first rule is to write down your goals, what is it that you really want from the markets, is it index beating returns, is it consistent dividend income, is it stable consistent growth and are you willing to take the punches? After all if the market corrected 10 percent, which it could would you be willing to take a temporary hit of 15-20 percent on your portfolio value without losing sleep.
Based on current stock market valuations the Nifty index currently has a price earnings ratio of 29.18 and while this has come down from 40.52 in March 2021, it's still moderately high. That said there are still some amazing stocks out there and with certain Government initiatives around disinvestment, infrastructure spending, PSU bank reform and a slight anti-China global undertone, it is not a bad time to be in the markets at all.
So what are some of the factors I would look at? Well capital preservation is important and a healthy dividend is always a plus for me. After years of picking "long shot penny stocks" and seeing capital disappear I would always suggest quality over quantity. Yes, some of these big names may be trading at higher valuations but there is still quite a long way to go in the medium to long term.
My top 5 parameters in picking stocks as a new investor would be as follows:
1) Look for market leaders in their space. A company that has consistently grown and innovated over at least the last 8-10 years minimum. If it's even longer, then better.
2) Look for companies that have rewarded their shareholders with good dividends and stock splits. Always good to look at promoters that reward their shareholders.
3) Look for companies that have strong moats, things that avoid the competition from storming their stronghold and taking market share. This is a big attraction to me and many such companies exist today.
4) Organisations that will gain from the ambitious disinvestment targets of the finance ministry is yet another good segment to explore. Truly there is a lot of value to be unlocked here in the months and years ahead.
5) Lastly I would suggest going back to the old rule of looking at the PE ratio of a company. I know in the age of Tesla and meteoric PE ratios this seems very old school but a lot of very successful investors have kept their eye on this and entered only when they found this to be at an attractive multiple.
My belief is that it's a great time to be in the markets and it is undoubtedly the start of a golden era of investing and big things will happen in the years ahead. Just be prepared for some hiccups on the way, keep your goals in mind, pick safety and value over a gamble and you'll be fine and join a very elite class of patient and successful investors. Always remember everything starts tiny and the best time to start is today.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.