The style of investing doing fundamental stock market analysis is called Value Investing.
It is finding the right stock at the right price and sticking with it for a long time. Warren Buffet says, His favorite time with stock is more than 10 years. You need to find a company that is fundamentally strong and as well as at its intrinsic value.
The most important problem of the stock market can be solved by following this value investing.
Which stock should i buy?
Stock is kept on rising, should i buy?
When should i sell my stock?
At any point in time, not every stock is going to rise in the index. Unless it is a bull market.
Based on this point you can buy certain stocks.
How to buy stocks ?
I was having a discussion with one of my friend and his biggest fear was, “How will i choose stock to invest from available 3000 odd stocks”.
He knows that stock market is a place to invest and create wealth. So i asked him to consider sectors which is known to him. Pharma, Automobiles, FMCG, IT, Banking etc are sectors which is almost known to everyone. Along with this you may also know certain companies in other sectors.
Consider buying only top 2 or 3 companies in all these sectors. One point in this is, not all companies are going to rise continuously. IT sector may be down during some quarters and at this time, Automobile as sector might increase.
When a sector increases, the top 2 companies will rise for sure. Beyond this point you should do due diligence on the fundamentals of the company and also in the future of the company.
In the Q2 and Q3 of 2019, Automobile as a sector was drastically down. Even top stocks came down drastically owing to pressure. For example Maruti, Eicher motors, TVS motors. All these were top performers and when the demand slump happened, these stocks also fell.
Once the market felt that the fall was huge, these stocks started rising again. Eicher motors touched 16000 and now trading at around 21500 points. Maruti which fell till 6400 is now trading at around 7200.
This is the advantage of sticking to top companies in a sector.
Why you must consider fundamental stock market analysis / Value Investing?
Paragh Parikh was one of the torch bearers of Value investing in India. His company Parag Parikh mutual fund house has Tortoise as the symbol. Slow and steady growth.
During the early 2000, most of the IT companies traded at very high evaluations. He stayed away from it and cautioned his investors also to stay away from it. Most of them felt confused and annoyed at his recommendation.
By the end of 2000, his predictions came true and most of the stocks fell like anything. Most of the retail investors had lost money in the bear market.
A simple technique that you can also follow us on the PE. If the PE of the Sensex is high, be cautious while buying companies. You should look at buying on stock to stock basis. Now also you should consider buying stocks which is available at lower PE.
PE varies with each sector. If the sector is capital extensive like infrastructure the PE will always be lower. FMCG, Automobile, IT will have higher PE’s. Compare the PE with its peer groups and also with their last 5-year average.
At present, the market looks expensive when you compare it with the economy of the country. Now also you can buy stocks if you can buy based on PE valuation.