Investing for first time investors
In the recent annual general meeting, one of the world’s greatest investors, Warren Buffet noted that investing is ‘not as easy as it looks’. He also commented that ‘none of the top 20 highest valued companies from 1989 are in the same list, 30 years later. It is a reminder of what extraordinary things can happen.’
Clearly, investing for sustainable returns is not an easy process. Here are some of the aspects of investing that can be challenging for first-time investors.
1. Risk tolerance – As different stocks have different risk characteristics; an investor must choose stocks that match his/her risk profile. For example, a blue-chip, steady dividend-paying company like Hindustan Unilever may be suitable for conservative investors while a commodity company such as Tata Steel may be suitable for more aggressive investors, given its volatile earnings growth.
2. Financial analysis – An investor needs to perform an in-depth analysis of a company’s financial performance. The investor will need to analyse the last 3 to 5 years of the company’s financial performance in terms of its sales and operating profitability. He will also need to evaluate the company’s standing within the industry and whether the company is gaining/losing market share in context to the industry.
3. Macro-economic analysis – An investor may also need to understand the dynamics of macro-economic policy. For example, banks and NBFCs tend to perform well when central banks have reduced their benchmark interest rates to encourage more bank lending and higher credit growth. Another example is the case for investing in the shares of PSU companies. An analysis of the disinvestment policy needs to be conducted to determine which PSU companies are investment-worthy.
4. Capital commitment – In order to build a diversified portfolio, an investor needs to invest in the shares of at least 15 to 20 companies. This would mean a capital commitment of at least Rs 5 lakh on the part of investors.
5. Time commitment – An investor needs to spend a considerable amount of time analysing the various factors listed above to select a suitable portfolio of stocks and continuously monitor this portfolio over time. Most first-time investors may not have the time to perform this analysis on an ongoing basis.
At DSIJ, we believe that the best approach to stock investing, especially for first-time investors, is to take the help of a stock advisor. Read more in this article on ‘selecting the best advisor’.