Choosing the Stock Picking Approach suitable to you

drvijaymalik.com/choosing-suitable-stock-investing-approach/

September 6, 2014

If we read about the experiences of successful investors, we will find that all of them had
their own specific methodology of picking stocks. They, in turn, might have been inspired
by other successful investors. However, there is not anyone specific approach to stock
picking, which has made them successful.

Benjamin Graham focused on investing in stocks that were selling at a discount to their
fair value. This is an example of the Value Investing approach. Philip Arthur Fisher (Phil
Fisher) focused on investing in stocks that were capable of growing at a faster pace as
compared to their peers. He justified paying a premium for such high growth stocks and
did not stress too much on finding stocks selling at a discount to their fair value. This is an
example of the Growth Investing approach.

Warren Buffett studied under Benjamin Graham during college and therefore focused
more on value investing in the initial stages of his career. However, later on, he
incorporated the guidelines of Phil Fisher in his investment philosophy. Now, as per
Buffett, his investment methodology is a mix of about 85% Graham and 15% Fisher.

So we can see that there is not only one single defined approach to achieve success in
stock picking. In fact, it is rightly said that ‘All roads lead to Rome’. However, each one of
these approaches has its own pros and cons. These stock-picking approaches might
differ in terms of the types of stocks they focus on. These approaches might also differ in
terms of the amount of time & effort required from investors and in many more ways. A
stock-picking approach, which is suitable for one investor may not be suitable for another.

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However, it is easy to find the stock-picking approach or a mix of the approaches, which
will be suitable for an investor. This article would help the readers to find such a suitable
stock-picking approach.

I have discussed various approaches to stock picking below. We, as investors, should
learn a bit about these different stock-picking approaches and then select the approach or
the mixture of approaches, which appeals to us.

Fundamental Analysis vs. Technical Analysis

Fundamental Analysis:
Fundamental analysis of a stock involves understanding the underlying business of a
company. While doing fundamental analysis, the investor tries to find out a company,
which has a very good product, well-known customers, stable suppliers, honest &
capable management etc. Once she finds such a company, then she can invest in its
stock and expect to benefit from the future growth of the business of the company.
Fundamental analysis is very similar to the in-depth analysis, which an entrepreneur will
do before starting a new business. I believe that the fundamental analysis approach to
stock picking is, in fact, a form of entrepreneurship.

Technical Analysis:
Technical analysis involves analyzing charts of the past movements of a stock’s price and
its trading volume over different time periods. It involves understanding the patterns in the
charts containing data of a stock’s price movement in the past. The investor then tries to
predict the future price movement of the stock based on these past patterns. Once the
investor finds a stock whose price is expected to move higher, she buys it and holds it
until the chart patterns indicate that the price is expected to fall or become stable. The
investor following technical analysis is concerned only with the past prices and trading
volume data of the stock. The investor is indifferent to whether the stock is of
manufacturing, an agricultural or a financial services company.

Comparison between Fundamental Analysis and Technical Analysis:

Most of the successful stock market investors have followed the fundamental analysis.
The fundamental analysis treats a stock investment as a way of having ownership in a
company’s business. This approach allows an investor to benefit from the enormous
wealth, which is generated by owning a successful business over a long period of time.
On the other hand, Technical analysis tries to predict the next ‘up move’ in a stock’s price
and is indifferent to the company’s business.

In fundamental analysis, once an investor has found a good company, she stays invested
in its stock for decades. Hence, if the investor was able to make at least a few good stock
investing decisions in her life, she will be able to earn a great amount of wealth. In
technical analysis, the investor buys a stock just before the next ‘up move’ in its price.

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She sells the stock after the up move has happened or if the up move does not occur and
the buying decision has been proved wrong. In technical analysis, the investor keeps the
stock with herself only for a few days or weeks. Many times, investors try to buy and sell
stocks with a few minutes during a day. Such kind of investment behaviour requires the
investor to keep finding the right stocks every few minutes/days/weeks.

Almost all successful investors say that finding good stocks for investment is difficult.
Therefore, if an investor has found such a stock, then she should stay invested in it for
long periods. Selling a good stock only after one ‘up move’ in its price is not a winning
decision in long term. Stock markets are very volatile and the periods of up & down
moves in a stock’s price are going to be very frequent. Therefore, an investor should not
fall prey to greed and she should not sell her stock when the prices move up immediately
after she buys it. Moreover, the investor should stay invested in the stock until the
company keeps on growing its business consistently.

I started stock market investing in 2006 by learning technical analysis. However, with the
continued reading and personal experiences in stock picking, I realized that fundamental
analysis is a better approach to stock picking. Therefore, I have been selecting stocks by
using fundamental analysis since 2008.

Read: Why I left Technical Analysis and never returned to it

Fundamental Analysis

Different sub-approaches under Fundamental Analysis:

Fundamental analysis has different sub-approaches to stock picking. All these sub-
approaches focus on the underlying business of the companies. However, they differ in
the methods of selecting stocks for detailed analysis and the features of stocks, which are
focused on future gains.

Top-Down and Bottom-Up approaches:

Top-Down approach:

The top-down approach to the fundamental analysis is also called EIC (economy-
industry-company) approach. In the top-down approach, an investor tries to identify those
economies (countries) of the world, which are expected to grow at a faster pace than
other economies. Once the investor has found such economies, she studies them in
detail. Within these economies, the investor tries to identify the industries, which are
expected to witness higher growth than other industries. Once the investor has identified
high growth industries in selected economies, she tries to find out the companies in these
high growth industries, which are expected to benefit the most from such expected
growth. Once the investor has finalized the list of such companies, she buys stocks of
these companies. The investor expects to benefit from the higher earnings, which these
companies are expected to create over the next many years.

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Bottom-Up approach:

The bottom-up approach to the fundamental analysis involves identifying companies,

which are expected to grow their business without restricting the stock-picking search to
any particular industry or economy (country). All the stocks listed in all the stock
exchanges in the world, irrespective of country or industry of operation, are open for
selection to the investor. The investor uses various selection criteria to search for the best
stocks. Such selection criteria help an investor find out the companies he likes e.g. the
fastest growing companies across all sectors or the companies, which are selling at a
discount to the cash in their bank accounts. Once the investor finds a good company, he
buys its stock and expects to benefit from the future growth of the business of the
company.

Comparison between Top-Down and Bottom-Up approaches:

The top-down approach limits an investor’s analysis of stocks of only a few countries and
a few industries. However, the bottom-up approach does not have this limitation. The
bottom-up approach provides an investor with the option of investing in those companies,
which are doing very good but are in industries, which are currently not doing well. Such
companies are known to make huge wealth for investors. Peter Lynch, fund manager of
Fidelity Magellan Fund from 1977 to 1990, has recommended investing in such
companies in his book One Up on Wall Street.

Thus, we can see that the bottom-up approach gives an investor more options to choose
his stocks for investment.

Growth Investing and Value Investing approach:

Growth Investing:

In the growth investing approach to fundamental analysis, the investor tries to find such
companies, which are expected to witness very high growth in business performance in
future. Once the investor has found such a company, she buys its stocks. The investor
expects to benefit from the future high growth of the business of the company.

Value Investing:

The investor following a value-investing approach of fundamental analysis tries to find the
fair value of the stock of a company by analyzing various business and financial
parameters of the company. After calculating the fair value of the stock of a company, the
investor compares it with the current market price on a stock exchange. If the investor
finds that the current stock price of the company is lower than the fair value of its stock as
per her calculations, she buys the stocks of the company. The investor expects to benefit
from the increase in the stock price aftermarket discovers the discount in the stock value
and increases the stock price to its fair value.

Comparison between Growth Investing and Value Investing approaches:

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In growth investing approach, the investor puts more focus on the future growth of the
company and ignores the current valuation levels of its stock as compared to
ongoing/past performance of the company’s business. The investor buys its stock at
whatever price it is currently available in the stock market.

Value investing approach of stock picking is equivalent to finding goods selling at a

discount in any market place e.g. a grocery store. A value investor will not buy the stock
of a company, which is expected to show good business performance in future if its stock
is currently selling at a price higher than its fair value. The value investor would think that
the current expensive valuation has already increased the price of the stock of that
company to such an extent that the potential of increase of the stock price in future is
limited. The investor would ignore this company and start the search for another company
whose stock is priced at a discount to the fair value.

If an investment decision goes wrong, then the risk of suffering losses, is much more in
growth investing, as it does not focus on the current valuation of the stock price. If a
company selected by growth investing approach does not grow as expected or its growth
slows down a bit, the stock market will punish its stock. In such a case, the stock prices
will fall very fast and the investor might lose a lot of her invested capital. However, in case
of companies selected by value investing, if the stock market does not realize the
discount available in the stock of a company soon, then its stock price might not increase
in the short term. However, it would provide the investor with an opportunity to
accumulate more stocks of this company. Thus value investing approach has a higher
“Margin of Safety” as described by Benjamin Graham.

It is said that the market may keep ignoring the discount available on a stock for a very
long time. Therefore, stock investing should have a very long-term investment horizon. It
is similar to an investment in family land or real estate. You do not sell the land or
property for every day-to-day financial need. Similarly, it is recommended not to sell
stocks for day-to-day financial requirements and look at them from a very long-term
perspective preferably in decades.

Our approach to Stock Picking

We have discussed the major approaches to stock picking. We have also seen
comparative features of different stock-picking approaches. It was mentioned at the
beginning of this article that every investor should choose an approach or a mix of
approaches, which she likes. After reading books of various successful investors, who
had followed different stock-picking approaches mentioned above and after personal
experience of about 8 years of investing in Indian stock markets, I have found the
following mix of stock picking approaches, which I like:

Fundamental Analysis:

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As previously mentioned, I prefer fundamental analysis for stock picking as compared to
technical analysis. I like fundamental analysis because it treats an investor as an owner
of the company and the fundamental investor needs to make only a few right investment
decisions in her life to make significant wealth as compared to a technical investor. On
the other hand, the technical investor needs to be on the lookout for the right stocks
almost daily.

Bottom-Up approach:
I prefer the bottom-up approach as compared to the top-down approach. If an investor
follows the top-down approach, she would find that the stocks of the companies, which
are expected to do good in high growth industries of such economies (countries), which
are expected to outperform other economies, are already overpriced. This limits the
choice of stocks available for her investments unless she decides to overpay for them. In
the bottom-up approach, the investor focuses on the good companies irrespective of the
industries and economies. Therefore, she is able to select stocks of good performing
companies from all the industries whether these industries are growing at a fast or at a
slow pace. If the investor follows the bottom-up approach to stock picking, she would
have better chances of finding out companies, which are growing at a fast pace but
whose stocks are priced at a discount currently.

Mix of Growth Investing and Value Investing approach to Fundamental

Analysis:

I follow a mix of growth and value investing approaches. I search for companies, which
have grown their earnings at a good pace in past and their earnings are expected to keep
growing in future. Once I have prepared a list of such high growth companies, I try to find
out the companies from this list, whose stocks are currently selling at a discount in the
market. This is like having the best of both worlds and many readers might think that it
won’t be easy to find such companies.

However, Indian stock markets are under-penetrated and only a few well-known stocks
are well researched by market analysts. Most of the large investors like FIIs, mutual funds
etc. focus on only about 400-500 stocks of large companies out of more than 5,000
companies listed on Indian stock exchanges. An investor can find the hidden gems
among these balance 4,500 stocks, which are not getting analyzed by stock market
analysts. These hidden gems offer an opportunity to invest in high growth companies,
which are available at very reasonable stock prices. I focus on this under-analyzed
segment of Indian stock markets to find potential stocks for my portfolio.

Thus to summarize, I follow a bottom-up fundamental analysis approach in which I look

for high growth companies available at attractive stock prices.

Any person who wants to be an investor can learn about these approaches for stock
picking. The investor can focus on the approaches which she finds suitable for her
according to her temperament, work schedule, lifestyle etc. The investor can choose to

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pick the best of the characteristics of various stock-picking approaches and mix them to
create an approach of her own.

Once the investor has decided about her stock-picking approach, she should start
searching for companies whose stocks meet her criteria. The investor should keep on
improvising her approach by incorporating lessons, which she would learn from further
readings and personal experiences in stock picking.

At the start of Warren Buffett’s investing career, no one could tell whether he would be the
most successful investor of all times. No one could predict the success of Benjamin
Graham, Peter Lynch or Phil Fisher. Similarly, no one knows whether you and I are going
to become successful & wealthy investors. However, the current requirement is to put in
the necessary effort in stock picking and wait for the future to unfold the results. Various
investors have become successful in the past. I believe that I can be successful at stock
picking and so can be anyone else who is willing to put in the required effort.

Our views on combining Fundamental and Technical Investing

(Techno-Funda Investing)
Trading Diary of a Value Investor

Benjamin Graham also talked about the margin of safety. Anyway, I enjoyed reading your
article and the criticism of technical analysis. I think you have made good use of the
contrarian approach with your stock selection technique. I also think you would have
made more if you had followed the trend and technical analysis strategies; you would
have certainly had more returns (add opportunity cost of holding investment) if you had
used trend analysis- buying Allahabad Bank during April-May 2009 (break of downtrend)
than buying in Jun 2008 and similarly for others.

Fundamental analysis is important but it’s not everything; without a doubt for long term
investing value investing is superior method; however, it will be difficult to practice for
small investors- You got to have lots of money so that you can buy in every dip. Small
investors, who can’t hold for ages, will cry if a breakout takes longer than anticipation.

For a small investor, technical analysis in conjunction with money management (position
sizing), risk management (stop loss) can also win big- I have made 82% while market
provided only 12% in 9 months period. The most importing thing is profitable belief about
the stock, trading discipline and know-how to cut losses short and let profit run using a
trading system.

I bet u can’t completely ignore technical analysis if u want to make your investment
decision objective and profitable.

Author’s Response:

Hi,

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Thanks for providing your views.

We agree that there are many approaches, which investors use to invest/trade in the
markets be it fundamental investing, technical investing, value investing, growth investing
and so on. Each approach is suitable for different investors depending on their personal
preferences like aptitude, availability of time etc. I advise investors to choose the
approach that is suitable to them.

We do not think that value investing needs an investor to have lots of money. We find that
every person who has surplus money to invest, irrespective of the quantum of money, can
practice value investing and benefit from it. Value investing requires discipline and regular
investing and not the quantum of money, to succeed.

As mentioned by you, we have provided my views about fundamental investing vs.

technical investing in the following article:

Why I Left Technical Analysis And Never Returned To It!

We believe that fundamental investing is more suited to our investing approach and wish
to keep following it going ahead.

Thanks once again for your inputs and all the best for your investing journey!

Regards,

Vijay

Should we adjust our investing approach based on predictions of

analysts?
Hello Dr. Vijay,

In the last couple of weeks, many analysts are saying 2016 will not be a good year for
Indian and global equities. Some are even mentioning situations not exactly like the 2008
recession but pretty similar to it.

What are your views on these statements?

Thanks,

Author’s Response:

Hi,

We do not have any views on the markets or these statements.

We believe that an investor should look for fundamentally good companies and keep on
investing in them until the time they are available at attractive valuations irrespective of
the level of general markets.

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You may use the following steps to find out fundamentally sound stocks:

Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger

Stocks

All the best for your investing journey!

Regards,

Vijay

Operators in the Stock Market and Our Views about it

Hello Vijay,

While analyzing some small-cap companies, I am frequently coming across a word in

some forums – “Operator Stock”.

What does it mean to a retail value investor?

How a retail investor can identify the trap?

Your detailed view will be highly helpful.

Best regards,

Author’s Response:

“Operator stock” is usually referred to as the stock whose price is manipulated by different
people. Small-cap stocks have a low market cap and operators need very low money to
influence its price. For example, to increase the price to double for a ₹20cr. market cap
company, an operator needs much less money than a ₹2.5 lakh cr market cap company.

As a fundamental long term investor, I do not worry about operators being active in stock,
until the time I am convinced that the company has a good business and is improving its
operating performance.

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding

Multibagger Stocks

Once we buy a stock, our holding or selling decision is rarely decided by the prevailing
market price of the stock.

Read: When to Sell a Stock

Operators may come and go. If the company is good, then an investor should hold on to
the stock irrespective of short term price movements.

Read: How to Monitor Stocks in your Portfolio

Hope it clarifies!

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Regards,

Answers to Investor’s Queries

Do we use mental models in stock analysis

Dear Dr. Malik,

I have just started reading your blog and found very informative, precise, to the point and
very practical in applications, I have few queries and would like you to shed some light on
it.

1. Do you find the concepts of multi-disciplinary thinking (mental models- Charlie

Munger) usable in common investing? If yes, then how they can be utilized. A case
study will be appreciated.
2. How can we discover some financial or non-financial factors that can seriously dent
price of stock before any bad news hits them?
3. Also, how much is past data useful to determine the future of stock as things are
unpredictable and any sudden hiccup can crash the price of stock? Please
mentions the parameters to include and exclude.
4. Finally, if u want to create a stock screener, then what parameters you will use and
give priority to.

Thanks

Author’s Response:

Hi,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

1) I do not specifically use any multidisciplinary thinking in stock analysis. However, as

most of the investors have multidisciplinary background: Science, Engineering,
Commerce, Medicine etc. before they start investing in stock markets, it becomes
indistinguishable that their prior education/experience would have some impact on their
approach to stock investing. The same, if impacts my stock analysis, then it would be
there. Else, I like to keep the stock investing simple and straight forward and have a
checklist handy to assess whether any stock meets my criteria.

You may read about my framework for stock analysis here:

Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger

Stocks

2) Discovering financial/non-financial factors impacting the companies in the portfolio is

part of regular monitoring of the stocks in the portfolio. I have written about the steps an
investor should use for monitoring stocks in her portfolio in the following article:

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How to Monitor Stocks in Your Portfolio

3) I believe that past performance data is the most essential input to assess the quality of
the business and the competence of the management of any company. These two
factors, if found satisfactory, would tell an investor whether the company and its
management would be able to face the unpredictable future by taking timely steps in the
changing environment or not.

You may read about business analysis of a company in the following article:

How to do Business Analysis of a Company

You may read about the management analysis of a company in the following article:

How to do Management Analysis of a Company

4) Stock screening parameters: As mentioned above, I use a checklist for stock analysis.
Most of the parameters in the checklist are objective parameters which can be used as a
filter in the stock screening software.

Final Checklist for Buying Stocks

Hope it clarifies your queries.

Regards,

Role of macro-economic factors in the stock selection

Hi Dr Vijay,

Thank for your continuous support and prompt reply.

I have gone through in details about your website and almost all term and articles and got
much more confidence in stock investment. I appreciate your work on such an excellent
website in short and sweet guidance

I have analysed some good business and want to invest but awaiting since some of the
fear factors.

Please clarify some of my concerns.

1. There is global economic fear about the US and Europe recession in coming years
(I read a lot for same), I have 60% invested in gilt funds and want to shift to stocks
so should I invest now or wait to have good opportunity to come.
2. Almost tensions are there in geopolitics, Indo- Pak-China, USA- Russia etc. factors.
3. All these external factors should I consider for investment in good company or there
will be a minor impact of such factors in future if the company business is good.
4. Which is bad for investment from your point of view sir- Wait for some time and
invest in late or invest in current time with good business.

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Thanks in Advance,

Author’s Response:

Hi,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

1, 2, 3) All these queries are related to external macro factors and their impacts on
stocks. As detailed in my stock picking approach on the website, I am a bottom-up
investor and do not base my investment decisions on macro factors. I ignore all the
macro factors while investing.

4) The best time to invest is whenever the investor has money to spare and invest in
markets. Whenever an investor is able to find good opportunities, she should invest.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

Should we change the investing approach if we suspect asset bubbles?

Respected sir,

I have some general queries relating to the aesthetics of the macroeconomic environment
today. The ECB has started its own quantitative easing a few months back and the FED
has almost done with that.

A question which bothers me is that with all this money floating in the markets the
economic fundamentals are still at a low indicating that this money is creating some asset
bubbles.

Of late, we have seen that the Indian tech startup environment has also begun receiving
voluminous amounts of funding despite a weak revenue generation by these companies
(the tech startups).

This brings me to my question which is the possibility of a bubble being created in the
Indian economy.

Author’s Response:

Thanks for writing to me!

The bubble might be there or might not be there. It might be there in certain asset classes
and might not be there in others.

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My reading of other investors, as well as investing experience over the last 9 years, has
established a belief that the investor should select quality stocks regardless of their
industries and buy them at attractive prices. If stock prices go down due to the general
economic situation, then it provides excellent buying opportunities.

Read: 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors

Therefore, I would advise that investors should not pay attention to macro-economic
factors and focus on buying good stocks at attractive prices.

Regards,

How should one look at stocks during a steep fall in prices

Dear Doc,

Please could you tell us how to spot and load up on quality stocks in this fall?

Thank you

Regards

Author’s Response:

Hi,

Thanks for writing to me!

The approach to select stocks does not change with temporary changes in the market
sentiment i.e. bull or bear phases.

An investor may follow the framework approach described in the article series: “Selecting
Top Stocks to Buy” to find fundamentally sound companies for investment:

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding

Multibagger Stocks

All the best for your investing journey!

Regards,

Sector-based investing

I see you don’t mention anything based on sector-related info when analyzing.

Author’s Response:

Thanks for writing to me!

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I follow a bottom-up fundamental analysis approach in which I look for high growth
companies available at attractive stock prices. I agree with Peter Lynch that high growth
companies in no growth industries are very good investments.

I believe that in bottom-up fundamental analysis, an investor should not worry about the
industry in which a company operates. Instead, she should focus on identifying
companies with sustainable distinct business advantage (Moat).

You may read about choosing our stock-picking approach here: Step by Step Process of
Finding Multibagger Stocks

Follow-up Query

I meant to say about the stock you are analyzing and not about the approach using which
you picked particular stock. Like when one analyzes a stock from the banking sector then
few different ratios will be needed to check. When analyzing stocks in realty/infra, then
debt can be little high and one needs to give little pass through in that case.

After reading your analysis, I got the impression that you analyze using a flat approach for
all kind of stocks.

Thanks for the reply.

Author’s Response:

Thanks for your inputs.

I appreciate your observation that I use a framework for analysing the business
performance of different companies. The framework around a few basic premises:

1. Companies need to grow

2. Maintain or improve profitability
3. Operate efficiently
4. Convert profits into free cash
5. Use internal cash accruals to fund future growth.

Further advised reading: How to analyse the operating performance of companies

This premise remains the same for all businesses. Even though there can be a lot of
other parameters to access business performance, I believe that if an investor tracks
performance of any company over the years, on these five parameters, then she would
be able to gauge the business performance of almost all the companies.

You are right in citing that companies in one industry would have different levels of ratios
(say profitability or D/E ratio) than companies in other industries. An investor might give a
little pass while comparing two companies of different sectors.

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However, if you analyse the business performance of any company over the past, then
the trend of change in its ratios when compared with previous years would indicate,
whether the company is showing improved business performance or not. E.g. an infra
company might have higher debt than a pharma company. However, if the debt level is
increasing year on year without an associated increase in sales and net worth, then it
would indicate poor business performance for both infra and pharma companies.

I do not track Banking sector companies, therefore, would not extend my views on that.

Hope it clarifies your query!

Regards,

Dr Vijay Malik

Is Peaceful Investing a Growth Investing Approach?

Hi Doctor,

Undoubtedly you are one of those gems who are rapidly increasing the respect ladder of
investment.

Like you, I am also a big fan of Screener. However, for last one year, I have been
struggling to identify growth stocks. I saw your method of stock selection. I can
understand all of these parameters apply to growth investing.

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding

Multibagger Stocks

Do you have any specific experience, which you would like to share on spotting growth
investing stocks?

Author’s Response:

Thanks for your feedback and appreciation! I am happy that you found the article useful.

You are right that the criteria mentioned by me under my stock selection strategies are for
selecting stocks which are witnessing good growth in their business. However, I do not
believe in overpaying for their growth.

Read: 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors

In last one year, almost all stocks have run-up in their prices, therefore, it has become
difficult to find good stocks available at reasonable prices. However, opportunities are still
there, only the effort needed to find them has increased.

All the best for your investing and blogging journey!

Regards,

15/18
Dr Vijay Malik

The investment philosophy of a reader, Ashish Malhotra

Friends, I am just 3 months old into the world of investing and have been learning about
the investment methods quite intently.

I have read The Intelligent Investor by Benjamin Graham and I am currently reading
Security Analysis, by Dodd and Graham. These are profound books on investing.

Dr Malik comes very close to the concept of investment as suggested by Graham and he
has presented a more practical approach by way of a step-by-step approach.

For a defensive investor, one should invest in index funds without trying to time the
markets. Again, an important aspect is to look for value proposition in these index funds
by way of looking at their PE ratios.

If one has a long investment horizon and invests regularly by way of systematic
investment plans (SIPs), then there is no threat of losing money. A little knowledge of ups
and downs of an index would come handy in getting good return from your investments
as one can take advantage of the boom and gloom periods. This statement is better
explained by Warren Buffett “Be fearful when others are greedy and be greedy when
others are fearful.”

I count myself to be a defensive investor at the moment until I gain enough insight and
understanding of our stock markets and identify & shortlist stocks that I would be
comfortable investing for a long period of time.

Dr. Malik has given the first-hand understanding of how stocks should be chosen and
invested in. I appreciate both the depth of his understanding and a simple and unnerving
way of deciding the stocks that one would like to invest in.

If we gain the basic understanding, follow his guidelines in identifying stocks and
courageously back our investments and hold on to our nerves during the irrational
exuberance of highs and lows we would do reasonably well in growing our wealth.

Stock markets in the short run are voting machines and in the long run are weighing
machines, which have to do an auto-correction over a long period of time. Stock markets
are like “mandis”, where there are buyers for every seller, if there are more buyers than
sellers, individual stocks would go up and vice versa.

Stock movements are random movements which one should take advantage of as much
as possible. Although these are distractions for investors, these distractions make certain
stocks very expensive and others very cheap and therefore an important behaviour of the
stock market is to shuffle the funds/investments.

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This movement/shuffling of funds is very well explained by Warren Buffett’s statement that
the stock markets is a machine for putting the money from the impatient to the patient.
For us as investors, as long as we can understand this phenomenon we should be more
appreciative of this behaviour.

I, being a defensive investor, have started to buy banking exchange-traded funds (ETFs),
infrastructure ETFs and energy stocks, which are selling cheap by way of valuations.
These stocks do not look to be darlings of the stock markets currently but should do well
in the 3-5 year horizon.

However, with a better understanding learned from Dr Malik and more learning with
various articles online, I have started to create my own portfolio as well, which I would
build as a portion of my investment. Based on my experience in the next 3-5 years, I
would change the ratio of my investments from the defensive side to the enterprising
investor like Dr Malik.

I would sincerely appreciate Dr Malik’s comments on my strategy: Should I be continuing

with this approach or should do some course correction?

I would like to learn more and would welcome suggestions for good books to read for
refining my approach further.

Thank you, Dr. Malik, for your articles and on behalf of all readers would like to extend our
heartfelt thanks for extending your help in answering our questions and concerns in the
most prompt manner.

God Bless!

Regards

Ashish Malhotra

Author’s Response:

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

It feels good to see that you have started to build a good foundation for your investing
journey, by reading Benjamin Graham.

Book Review – The Intelligent Investor by Benjamin Graham

He is indeed one of the greatest teachers of stock investing to a common investor. I can
appreciate that you have been inculcating teachings of great investors when you mention:

“Be fearful when others are greedy and be greedy when others are fearful.”

Stock markets in the short run are voting machines and in the long run, are weighing
machines which have to do auto-correction over a long period of time

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The stock markets are a machine for putting the money from the impatient to the patient.

You are right in saying that an investor should get the basic understanding of stock
investing, make a system/framework for identifying stocks, courageously back her
investments and hold on to her nerves during the irrational exuberance of highs and lows,
then she would do reasonably well in growing her wealth. And until an investor feels that
she has got the requisite expertise of stock investing, she can always choose to invest in
mutual funds so that her errors of stock selection during initial phases do not have a lot of
impact on her portfolio. Later on with gaining expertise, she can shift her money from
mutual funds to her direct stock portfolio.

I feel happy that you have started in the right direction. After reading Benjamin Graham,
you may read Peter Lynch. I have reviewed one of his books: One up on Wall Street in
the following article:

Book Review – One Up on the Wall Street

All the best for your investing journey!

Regards,

Dr Vijay Malik

This concludes the second part of this series of articles about the process of Selecting
Top Stocks to Buy. Please let me know how you think about stock investing and the
process that you follow.

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of
writing this article.

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