💸 How to pick stocks and make money

Let’s listen to some music while we read this, shall we?

The best way I can talk about this is by explaining what not to do.

Photo by Jeremy Bezanger on Unsplash

Know who you are — speculator or investor?

Remember, holding a stock for more than a year doesn’t make you an investor. Speculation is anything you do that doesn’t answer why you are invested in a stock and which can be backed up with facts rather than fictional future stories. Speculation has its game, but don’t be fooled by calling yourself a value investor.

Look at books, not stock prices.

The biggest mistake I have made is looking at prices and creating a mental bias. “$40 stock looks cheap; let’s buy a lot of it.” Next, “Let’s look at the charts and do a technical analysis.” Nobody I know is good at it, including me. Stock movements are controlled by larger Institutions. See also: Option chain.

What I do instead is look at stock prices as a reality check. Have I valued the company at a fair price? and does the market value it fairly enough? If the current market price is higher than the intrinsic value, I don’t buy. (Very simply said, but complicated to assert.) If the market price is lower than intrinsic value, it gets my attention.

Validation is ROCE and not YouTube videos.

The next mistake I made after buying something cheap was to look for validation. Going to YouTube to search videos for “Tesla stock price prediction” and getting validated to hear some people suggest “The best time to enter is now” gave me a good sympathetic boost. I couldn’t be more wrong. We, as humans, always seek validation and to counter our ‘no knowledge investment’ is to get reasoned by someone else.

Instead, sweat the boring stuff. Look at the return on capital employed that the company is generating and how consistently. What does the cashflow of the company look like and why should you invest? YouTube videos are great for providing information about these, but the responsibility to validate is yours.

Instead of FOMO, be inspired.

My sole inspiration has always been Mohnish Pabrai. I have taken his lectures at renowned universities, sitting in a metro city in India. The simplicity of thought has given me the energy to go long.

FOMO kicks in from friends, Twitter or bad inspiration. It is good to copy the stock picks, but getting influenced to buy a company is surely something you should rethink. If Mohnish today tells me Apple is a great stock to buy, I will get excited and 100% interested, but placing the buy order will go through a huge internal checklist of WHYs.

Owners and not a cheerleader.

A 15% YOY increase is sexy, but it makes you a lucky speculator. Think of yourself as an owner of the business and not just a cheerleader. The holy grail of ownership comes from accountability. Keep the management answerable for their decisions. Your basic duties are to listen to quarterly calls, read the financials, and validate if it fits right with what you originally envisioned for your investment.

Concentrated and not a flock of stocks.

If you have more than six stocks in your portfolio, you should be worried. If you have more than ten stocks, you should be scared as hell. Simply ask yourself, “Do I understand all ten of the businesses I own?” CEOs of these organisations have spent their lifetime learning to be great at it. How do you qualify? Know your circle of competence and stay with it.

Compounding is great when money is doubled or tripled, but it is equally bad when it happens in the negative.