As far as I can remember my father has always been interested in stocks. When I was young I failed to understand his fascination for analyzing companies and investing/trading in them. I, like the rest of our family which includes my mother and sister thought it was a sheer waste of time especially because we did not get to watch our choice of TV channels so that my father could see the latest news which could affect my father's portfolio!
I was always interested in spending as much time as possible with my friends after school/college.My friends on the other hand were very career oriented and wanted to pursue Science although I preferred Commerce as it would give me more time to spend with my friends after college. But they all joined Science and I followed them(herd mentality?). When we were in college doing Science all my friends wanted to join Engineering and I wanted to do B.Sc. Less effort, more time with friends being my reasoning. Eventually I got into Engineering and in the second year I realized that I really liked programming. I decided that I would make a career as a programmer.
By the time I passed out from Engineering the jobs had dried up due to the technology related stock market crash and I had to start my career in a call center. I lasted only 2.5 months as my heart still lay in programming. I left the call center and luckily got a job in an IT company. The company had a production department and I worked there and could not program for 1.5 years. Besides I had a salary which was half that my colleagues were earning and I think they were not 1/2 as good as me at programming because they did not like it in the first place. I was good at my work and had plenty of free time. This is when I first got interested in stocks as I wanted to earn more money. I started analyzing the performance of mutual funds from various websites and started investing in them and making extra money. Eventually I got into the software department of the company. I learned the software in 3 months and was able to get a better paying job in a big company which gave me double the salary that I was earning at that time.
Even though I was now earning a good salary my interest in stocks continued. I could buy stocks and make money but I was not satisfied. The reason was that I could buy a stock at Rs. x or at Rs. x+10 or at Rs. x-5 but I could not determine what was the correct price to pay for a stock. Why was it that the stock prices fluctuated so much? So I started reading books and joined a MBA course to learn more about how companies handle their finances and get acquainted with the financial jargon. At that time I only knew how to buy and sell stock. No research. Pure speculation. My father used to advise me and still does but I rarely listened to him because I like to learn from my own mistakes. But over the years after reading various books I have observed that he has reached similar conclusions that the authors reached in their lifetimes. I will share the investment methods of these authors in the following paragraphs.
The first 2 books that I read were written by a mutual fund manager. He said we should invest in stocks that we knew about. So a software professional should invest in IT stocks, doctors in pharmaceuticals and so on and so forth. He divided stocks into various categories like cyclical,turn around, slow growers, fast growers, etc. He suggested that we should buy stocks which have P/E less than the Growth in EPS. For example if a stock had a P/E of 20 and its growth in EPS was 25%, we should invest in it.
I invested/traded using the above technique but was still searching for a better method to value a stock.I came across a book in which the author suggested that we should buy stocks with low P/E (less than 10) which are at their lowest yearly prices and which were selling at a price less than the working capital of the company. Although I could find low P/E stocks I could rarely find stocks selling at less than their working capital. Also the stocks with low P/E did not offer such good returns although they preserved capital and did not cause huge losses.
I then came across a book in which the author suggested that the P/E of a stock is not that important. The only factor that is important is the future prospects of a company. If the future of a company looks good it is obvious that the market will accord it a higher P/E and that should not dissuade an individual from investing in it. He suggested that we should analyze the company's sales, profits, margins, future plans, management quality, etc. and decide if the company is worth investing in. He was of the view that if we select the right company we would never have to sell the stock and a higher price paid for the stock would eventually be recovered with the scope for outstanding returns.
The last book that I read suggests a combination of all the methods mentioned above and I am currently implementing it. The results seem good so far even though the Indian and Global markets have suffered huge losses after the bankruptcy of Lehman Bros.
That's how my journey of investing in stocks has been so far. But the question that I still can't answer is whether I was destined to like stocks (because of my father) or was it fate (bad paying job forcing me to look for an alternative to earn more money) or is it that I just made a choice (irrespective of my father's liking for stocks or the bad paying job)?
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