Value Investing

I was talking to few of my office-mates and realized that out of the team of forty, just ten had exposures to equity (shocking??) and only three-four have demat account and actively trade in stocks. It is not the effect of the recent meltdown, but despite the euphoria that existed just few months before about Indian stock market, lot of people still are stuck with traditional investment/saving plans.

I guess the real reason is the fear of loosing money. I usually do not blog about stocks, since I do not believe in giving recommendations of buy or sell. But for a normal investor, it makes sense to involve stocks as a part of his investments, but it is also important to make it part of long-term strategy rather than thinking short-term.

When I talked to few people, I realize that people want to invest in stocks because:

1. I want to get quick returns (with few months, I can double the money etc)
2. My friends are investing and so I should too
3. I has some lump-sum money, some relatives/friends suggested to invest in stocks.

Most of the retail investors have wrong expectations from the stock market, especially after hearing of friends, relatives earning big bucks from stocks.

It is important to understand that “Nothing is free in life” including returns from stock-market. The people who have earned those handsome amount, have either burned their fingers earlier or have spent lots of time on understanding markets and investing in smaller amounts.

Nobody got instant money from stock market without hard work.

Investing in stocks requires a disciplined approach. One such approach is what is called Value Investing. In simple terms:

Buy stocks which are priced below it’s intrinsic value.

The approach to finding “intrinsic value” is by determining the fundamentals of the company. It is a balanced approach involving analysis of data involving the company. There are lot of books available on the topic (e.g. this book), but “The Intelligent Investor” by Benjamin Graham is considered as the bible of value investing (you can get an e-copy on ensips here, but may be illegal). There are lot of excellent forums for beginners or experts on investing in Indian Stock Markets like Traderji or Equity Desk (an excellent post by Basant on Equity Desk).  I am currently reading the book and may do a review sometime later.