The Hindu Business Line : Dos and don'ts in stock picking

If you are an investor on the look out for undiscovered stocks with great growth prospects, be assured you are not the only one! With the stock market no longer predictable, chancing upon value buys in the current market is no more anybody's game. If the bull market that made us all feel like geniuses, remember that the same market, when in a downward or sideways mood, can make fools out of geniuses too. The point is though stock picking in this market is not impossible, it is not going to be easy either. You would have to exercise more caution and restraint.

Though there are no foolproof ways of stock picking, there are some dos and don'ts to help invest wisely. Here are some of them.

Stick to fundamentals

Remember to put money only in those stocks that you think are well-placed fundamentally. A company in a known business with reasonable financials is likely to provide better returns over the long term than one without a convincing business model or history.

Keep in mind that returns, in most cases, are commensurate with the risk you are willing to take. Hence, you would be better off keeping a moderate return expectation from your investments if you plan to stick to the safe bets (read fundamentally good stocks) in the market.

Do your own homework

Nobody can comprehend your investment needs relative to your risk tolerance better than yourself. Hence, it is advisable to do your own homework on any stock you plan to invest in, especially when the market appears volatile. Basing your investment decision on your broker or even a successful trader friend whom you consider the ultimate authority on the stock market, can prove to be costly at times.

Buy in instalments

Once you have identified a good stock to buy, it may also make sense to consider accumulating stocks in small lots, over a period.

Notwithstanding the short-term price fluctuations that can act against you, this strategy is likely to help mitigate the risk of buying stocks at a high price, thanks to the benefits of averaging your investment.

Furthermore, it would also ensure that at any point of time, you are left with cash to buy stocks when the market appears weak. Similarly, you can also consider pyramiding your profits on stocks when the stock price appreciates, that us, selling small lots at different prices.

Confront your fear of regret

If you regret not having invested in a particular stock (a multi-bagger now) that your friend or broker recommended in the past and feel compelled to do so in the latest recommendation from them, think twice. Investment decisions cannot be emotional ones. Moreover, markets always throw up opportunities to make money and, hence, an opportunity lost is certainly not the end.

Fear of regret can also creep in when you invest in a stock recommended by your friend, after which it tanks 50 per cent. This could prompt you to stay away from even good stocks that are recommended later on. Though stock markets are sentiment-driven, remember that it always pays to make informed decisions rather than emotional ones.

All said and done, these are only guidelines to assist you in picking the right stocks. At the end of the day, you need to put in sufficient efforts to make a well-informed investment decision.

Remember the old adage — "What's obvious is obviously wrong."