Most people work hard to become wealth. Work is a necessity. But work does not automatically lead to wealth unless you are in first 3 level executive position in your organization. In India, people are more attached to core banking, fixed deposit and insurance. Bankers and insurance agents recommend savings accounts and insurance products that promise a return. But the underlying truth is that insurance and saving accounts never makes you rich against inflation rate. Do you know one WINNING STOCK CAN SAVE YOUR ENTIRE PORTFOLIO and make you rich!
Capital markets offer an important approach to building long-term wealth. Long-term wealth creation is not rocket science anymore and in long term risk is Zero. Index or passive investing gives the investor the average return that the market delivers. Index funds are first choice of long term wealth creation.
Index funds are less expensive and average return that market delivers
The next investment avenue is direct equity investment, stocks. Everyone had our fair share of bad experiences with the stock markets. From alleged management frauds to the global financial crisis, the recent covid pandemic and sometimes simply it’s our stock picks that don’t work out the way we had thought they would! We will let you in on a little secret. The top investor Warren Buffett has a success rate of only 58% when it comes to picking the right stocks
Just 50% of your stocks gives better returns, you would become rich.
Imagine you have selected 10 stocks for your portfolio and holding it for long period, say the next 40 years. Let us consider a scenario wherein five of the 10 stocks in your portfolio performed exceptionally well, generating 15-30% CAGR. While the other half of the portfolio is complete loss and no returns completely. An interesting observation is that the compounding returns of the right stocks more than makes up for the losses of the other ones.
Now, consider a second scenario wherein the investor picks went completely wrong in 9 stocks but one stock wins. You may think, there goes all my money down the drain! But the results would stun you! you are still bound to earn lofty returns in the long run! Meaning, even if a single stock yields a 30% CAGR with the
others losing 100% completely, your entire portfolio is still bound to earn a healthy 22.73% return if held on for the next 40 years.
if a single stock yields a 30% CAGR with the others losing 100% completely, your entire portfolio is still bound to earn a healthy 22.73% return
The compounded returns of the one right stock has the power to not just exceed the other loss-making bets but also turn around your portfolio’s entire investment performance in the long term. However, for the winnings of our right pick, the sky is the limit! Year after year, money from your investment in the winning stock would keep growing, intensifying your returns from the stock, all thanks to the magic of compounding!
The takeaway is clear: Do due diligence and thorough research of the stock before investing. Devote our time and attention to studying the stock, gaining a complete understanding of the business, its risks and opportunities, and the financial position. The rest is a game of patience! Our patience will bear fruit only in the long run.
One right Winning stock is capable of overpowering the negative returns of the losing ones.
Stock market is real wealth creator. Start investing in the business you understand. Invest in debt free companies. Look for better stock with P/E ratio less than 20. If you are looking for annual bonus, invest in dividend yielding stocks. Look at promotion credibility and holding in the company. Promotor holding must be greater than 40%. In case looking for small cap stock, invest in supplier to large cap organization. Even your 50% of selection is right, you can earn in crores.
Investment in best stocks is like planting the sandalwood tree. It would make you rich after 25 years. Be patient in the market
In case you are not able to invest in right stock, Consider Nifty 50 and Nifty Next 50 mutual funds. The Sensex has multiplied 460 times, or a cumulative return of 16%, since its inception in March 1979. During this time, gold has multiplied 68 times (a 10% compounded return) and bank savings have multiplied 36 times (compounded return of 9%). The future of stocks looks fascinating. If only we had the patience to wait and invest in stocks, you will be rich.
Best mutual funds to invest in
- Mirae Asset Emerging Bluechip Fund
- Mirae Asset Large Cap Fund
- UTI Nifty Next 50 Index Growth Direct Plan
- L&T Nifty Next 50 Index Growth Direct Plan
- ICICI Prudential Nifty Next 50 Index Growth Direct Plan
- UTI Nifty Index Growth Direct Plan
- L&T Nifty 50 Index Growth Direct Plan
- Motilal Oswal Nifty 50 Index Growth Direct Plan
These are some financial ratios that one should look at before investing in a stock. You can create free account in screener to analyze a stock.
1.) P/E RATIO
The price-to-earnings, or P/E, ratio shows how much stock investors are paying for each rupee of earnings. It shows if the market is overvaluing or undervaluing the company.
One can know the ideal P/E ratio by comparing the current P/E with the company’s historical P/E, the average industry P/E and the market P/E. For instance, a company with a P/E of 15 may seem expensive when compared to its historical P/E, but may be a good buy if the industry P/E is 18 and the market average is 20.
2.) PRICE-TO-BOOK VALUE
The price-to-book value (P/BV) ratio is used to compare a company’s market price to its book value. Book value, in simple terms, is the amount that will remain if the company liquidates its assets and repays all its liabilities.
3.) DEBT-TO-EQUITY RATIO
It shows how much a company is leveraged, that is, how much debt is involved in the business vis-a-vis promoters’ capital (equity). A low figure is usually considered better. But it must not be seen in isolation.
“If the company’s returns are higher than its interest cost, the debt will enhance value. However, if it is not, shareholders will lose”.
A high P/E ratio may indicate that the stock is overpriced. A stock with a low P/E may have greater potential for rising. P/E ratios should be used in combination with other financial ratios for informed decision-making.
4.) OPERATING PROFIT MARGIN (OPM)
The OPM shows operational efficiency and pricing power. It is calculated by dividing operating profit by net sales.
Higher OPM shows efficiency in procuring raw materials and converting them into finished products.
It measures the proportion of revenue that is left after meeting variable costs such as raw materials and wages. The higher the margin, the better it is for investors.
While analysing a company, one must see whether its OPM has been rising over a period. Investors should also compare OPMs of other companies in the same industry.
5.) EV/EBITDA
Enterprise value (EV) by EBITDA is often used with the P/E ratio to value a company. EV is market capitalisation plus debt minus cash. It gives a much more accurate takeover valuation because it includes debt. This is the main advantage it has over the P/E ratio, which we saw can be skewed by unusually large earnings driven by debt. EBITDA is earnings before interest, tax, depreciation and amortisation.
6.) PRICE/EARNINGS GROWTH RATIO
The PEG ratio is used to know the relationship between the price of a stock, earnings per share (EPS) and the company’s growth.
Generally, a company that is growing fast has a higher P/E ratio. This may give an impression that is overvalued. Thus, P/E ratio divided by the estimated growth rate shows if the high P/E ratio is justified by the expected future growth rate. The result can be compared with that of peers with different growth rates.
A PEG ratio of one signals that the stock is valued reasonably. A figure of less than one indicates that the stock may be undervalued.
7.) RETURN ON EQUITY
The ultimate aim of any investment is returns. Return on equity, or ROE, measures the return that shareholders get from the business and overall earnings. It helps investors compare profitability of companies in the same industry. A figure is always better. The ratio highlights the capability of the management. ROE is net income divided by shareholder equity.
8.) INTEREST COVERAGE RATIO
It is earnings before interest and tax, or EBIT, divided by interest expense. It indicates how solvent a business is and gives an idea about the number of interest payments the business can service solely from operations.
One can also use EBITDA in place of EBIT to compare companies in sectors whose depreciation and amortisation expenses differ a lot. Or, one can use earnings before interest but after tax if one wants a more accurate idea about a company’s solvency.
9.) CURRENT RATIO
This shows the liquidity position, that is, how equipped is the company in meeting its short-term obligations with short-term assets. A higher figure signals that the company’s day-to-day operations will not get affected by working capital issues. A current ratio of less than one is a matter of concern.
The ratio can be calculated by dividing current assets with current liabilities. Current assets include inventories and receivables.Sometimes companies find it difficult to convert inventory into sales or receivables into cash. This may hit its ability to meet obligations. In such a case, the investor may calculate the acid-test ratio, which is similar to the current ratio but with the exception that it does not include inventory and receivables.
10.) ASSET TURNOVER RATIO
It shows how efficiently the management is using assets to generate revenue. The higher the ratio, the better it is, as it indicates that the company is generating more revenue per rupee spent on the asset. Experts say the comparison should be made between companies in the same industry. This is because the ratio may vary from industry to industry. In sectors such as power and telecom , which are more asset-heavy, the asset turnover ratio is low, while in sectors such as retail, it is high (as the asset base is small).
11.) DIVIDEND YIELD
It is dividend per share divided by the share price. A higher figure signals that the company is doing well. But one must be wary of penny stocks (that lack quality but have high dividend yields) and companies benefiting from one-time gains or excess unused cash which they may use to declare special dividends. Similarly, a low dividend yield may not always imply a bad investment as companies (particularly at nascent or growth stages) may choose to reinvest all their earnings so that shareholders earn good returns in the long term.
A high dividend yield, however, could signify a good long-term investment as companies’ dividend policies are generally fixed in the long run.
While financial ratio analysis helps in assessing factors such as profitability, efficiency and risk, added factors such as macro-economic situation, management quality and industry outlook should also be studied in detail while investing in a stock.
12) PROMOTERS HOLDINGS
What is the position of the promoters’ holding in the company? “Companies with minimal pledging of promoters’ holding shall be identified and preferred over companies in which a majority of the promoters’ holding is pledged. (High pledging of promoters’ holding shows doubts regarding the management of the company with the lenders and anytime the shares may be sold off in the market, causing a downward spiral in the stock prices),” informs Mehta.