A stock price is a reflection of the company, its performance, and its future direction. But sometimes, the market fails to pick the nerves of the company fundamentals. If you enter in a stock of a company whose valuation is more than the current market price, the stock market will eventually follow the price. Hence, one should not time the market but should hold the stock of the growth making company for long terms in terms of 10 years or more duration. Warren Buffet who is considered as the world's best investor said that one must invest in the best company with cheaper price. He also says that one should not necessary to have complete knowledge of finance in order to remain invested in the long term. Just invest in a company and forget it for 10 years or more. You do not need to do anything in between except holding the shares. I am here going to discuss the strategies to pick a stock for long term investment.
Company and product information
If you are going to invest in a particular company, you should know the company thoroughly. You should look at the products it is manufacturing, popular brand names of its products. Answer the following questions to assess the company and its product.
It is rightly said by Warren Buffet that "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price".
Understand the business
If you do not understand the business, you should not invest in it. This is one of the fundamental rules of investing in the stock market. Warren Buffet never invested in a company whose business is unfamiliar to him. For example, being a mechanical engineer, I can understand the business of automobile companies. The sectoral changes with respect to government policy change affect the business of the company and it is very well reflected in the share price. Thus, it is of utmost importance to know the company and its business well before making an investment decision. One should understand and implement Porter's five forces for selecting a company for long term investment.
Time to invest
After the company is chosen, what is the right time to invest in a company for a long time? When it comes to long term investment, there is no right time. If you have taken a decision to select a company, just buy it. Today is the best day for long term investment. How long you should remain invested in this stock? One should hold at least ten years (ideally lifetime) or more in order to get rid of the volatility of the market during the rise or fall of the market. For example, if you had invested in HDFC bank in the month of 2015, the price of the share was Rs 180 and the current price as on 08 March 2020, is 1135 thus, the share price rises around 5 times in 10 years.
Never lose your money
You should have an exit price in mind before you invest in a given company. For example, a company does fairly well in a given month or year but suddenly starts falling next month, at that moment, exit the company if it is falling below the exit price or stops loss. If it goes beyond, it will be very difficult for the company to recover the initial buying price from the current falling level. Read more about "never lose your money". Look at the example of Dewan Housing Finance Limited (DHFL) which is actually a financial company that provides the home loans. The company was doing excellently well till September 2018, a month wherein the DHFL share fall suddenly from Rs. 622 level to 275 level. If one has put a stop loss, one can exit the share well before a huge fall and avoid further loss. The same case applies to Yes Bank share. It has fallen from Rs. 394 level to level of Rs. 11 (on 6th March 2020).
Study the performance of a company
The performance of a company is estimated based on different parameters like profits, sales, and revenue. If a company is only making profits without any increment in sales figures, it reflects the price rise of a product. If a company records high sales growth but lower profits, it suggests that the company has reduced the price of the product to drive more sales growth. Thus, in order to capture a growth company, one has to identify the company with both sales and profit growth. One should also look at the assets and liabilities during a year on year basis. These figures or parameters reflect the overall performance of the company.
One can pick a stock for long term investment by keeping company information, product, business competence, sales and profit figures.