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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Step-By-Step Guide To Buying The Best Stocks

Except for a few intelligent and diligent investors, most people do not follow the right approach to buying equity shares.

Hence — except for this handful of smart stock pickers — most people lose money at the stock markets (or at best make very little profits).

You would certainly want to be a part of this elite group. You would hate to be among the many amateur investors, who have mainly dud or overpriced stocks in their portfolio.

The process of equity investing is no secret. But, people often tend to overlook the same. For the umpteenth time, therefore, a simple step-by-step guide on how to buy the best stocks is presented below.

Beware: Before you begin, please note that 
(a) you have to do lots of DONKEY work to become a successful BULL on the stock markets, and
(b) investing in equity is just like running a marathon; don't treat it as a 100m dash.

Not paying heed to the above warning, is an open invitation to disaster.

Step 1: Stocks are not mere symbols 
Stocks are not mere trading symbols or abbreviations on your computer / smartphone screen.

They are much more than that. They represent a company. And, this company is running a business.

So, when you buy stocks in a company, you are becoming a partner in that business. Just like the promoter or the owner of that company, you too have to now share the profits (and losses too) of that company. Hence the term shareholder!

Lay investors often buy stocks based on (so-called) hot tips. So, they merely know the trading symbol. They are completely unaware of what the company does. In fact, in many cases they don’t even know the proper name of the company.

In other words, buying stocks is not a game of buying some symbols. It is a serious business of buying a business.

Step 2: Good business = Good money
Now that you appreciate the fact that you are investing in a business, it is but logical to look for lucrative and bankable industries. Loss-making sectors are not likely to bring in any profits to its promoters and shareholders.

Secondly, and obviously, the businesses should have a bright future. Investing in an industry, whose products and services are not in demand (or not likely to be in demand), will surely end-up making losses.

Healthy industry prospects equals likely healthy company profits equals likely healthy shareholder returns.

It is indeed shocking that many investors don't get this simple fact right.

Step 3: Good management = Good business
Of course, being in the right business is NO guarantee to a successful venture. Therefore, even within the same "successful and sunrise" industry, you will come across both money-making and money-losing companies.

The difference, primarily, is due the management. Because, in any business, the quality of entrepreneurship matters A LOT!

Good managements make good businesses. Bad managements fail frequently.

Hence, backing proven business managers is the most sacrosanct and inviolable principle of investing in stocks.

Stocks can be your BFF (best friends forever). Choose them wisely.

Step 4: Operational Performance
Sometimes, even good managements and good businesses go through tough times. In fact, some businesses even fail.

So, apart from running a good business and managed by a good team, you have to also ensure that the company makes good sales and earns good profits. If the operations are not generating money for the company, they won't make money for you too.

Never invest in a loss-making company, unless you see strong signs of a turnaround in the near future.

As Warren Buffett rightly commented "Stocks do well or poorly in future because the businesses behind them do well or poorly – nothing more, nothing less."

Step 5: Strong Financial Foundation
Operational performance is one part of the story.

The other significant aspect is the financial foundation of the company.

For example, too much debt may not be an issue during good times. But it can seriously threaten even the company's existence when economic conditions turn bleak. Within a matter of months, the profits can disappear. And, in no time, your goose that was laying golden eggs may be dead.

So, apart from sustainable profits, you need companies with strong balance sheets too. These will have the capacity to withstand economic shocks.

Step 6: The price that you pay
Wait! A company with excellent business, excellent management, excellent financial strength and excellent profits does not automatically become an excellent buy.

No. There is one more critical parameter — its market price.

Howsoever good the business may be, there is a limit to what you pay for its share. If the price is too high — relative to its underlying value — even excellent shares will not make money for you.

As aptly mentioned in the book The Intelligent Investor “Although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go.

A reasonable PEG ratio determines a reasonable buy.

Step 7: Does it match your profile
The last and equally important point to ascertain is... ‘Does the stock fit into my portfolio?’

Having high exposure to a particular sector? Avoid adding more to it, even if you come across an exceptional stock.

Having low risk appetite? Avoid mid or small-sized companies. These carry much higher risk when compared to the large-sized companies.

Having a limited investment time-frame? Avoid new projects and start-ups. These usually have a long gestation period. The real benefits are still many years away.

In other words, a good stock is good (for you) provided it has the right synergy with your profile and portfolio.

This briefly is the Safe, Sensible and Steady approach to buying (good) shares. A strategy that will surely give you many more winners than losers! After all, to succeed you don't need ALL the players to excel. A few good performances, backed by at least average play from the others, will definitely win you most matches.

Therefore, honestly speaking, never buy stocks IF you are not willing to put in hard work and show exemplary patience.

Else, please (please) put your money in the mutual funds. You would still go home happy and wealthy with mind-boggling returns.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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