What are the 3 things to look at while choosing Quality stocks?
The most important thing to do during the time of the market crash or whenever you want to invest in the stock market is to choose quality stocks.
3 things to look in while choosing Quality stocks :
The 3 most important thing to focus are,
2) Time period
3) Easy to understand companies
It is not one single factor like a brand which defines the quality of the company. The above points are a few of the essentials which will help in identifying a quality company.
Also during events such as these all the management issues, debts, withstanding the crisis etc will make them great companies. Only a great company with vision a can do this.
Let us look at all these points in detail in the next 3 days.
Management helps in making or breaking a company :
If there is an issue which is affecting the company, how are they responding matters a lot?
When Infosys was reported for malpractices in getting projects, the very next day Nandan Nilekani, CEO came openly and said that we will support the investigations in these matters. He didn’t blame the management team.
When Yes Bank crisis just started, there wasn’t any such talks from the management and it was open that something is happening badly.
On the positive side, if the management is buying back their shares or issuing dividends it means that everything is going good.
An easy way is to analyse their last 5 years Annual reports. If they had done everything as per the reports, then the market cap of the company would have increased automatically. Now the quality company can be chosen with this one single criteria.
Time period :
If you are investing also, you need to stay invested for a long time.
Even when you are choosing a company you need to choose a company which is in the market for very long time. This simply means that the company had gone through various cycles and withstood the crisis time.
Warren Buffet took almost 30-40 years to invest in Coca-cola. He has been drinking that from his childhood. By the time he started investing it was 100 years old company. He even announced that in their company annual meet Cherry coke will be served.
For almost 10 years he has been analyzing the management decisions and the valuations. He was waiting for the change in management and its effect on the stock price.
Only when he had found satisfied with all the conditions, he took the decision of buying the stocks.
So this is also one of the criteria for choosing the company.
Easy to understand companies :
A company’s operation from end to end should be easy to understand.
Warren Buffet invested in Washington post when he knew how they are making money. He served newspapers in his neighborhood during his childhood. He also served in his local area running a newspaper.
Also while buying GEICO, an insurance company he knows and understood the complete insurance company running process.
The above 2 companies are just an example, you can choose any Indian company in which you are able to understand the operation, profit margin, etc.
Capital less intensive, with an economic moat, is an added advantage. Finding a company with an economic moat is an essential thing as it is almost assured of growth and returns.
Wealth creation is possible when you are able to follow all 3 points while choosing a quality stock.