Gaining experience for doing equity research

Hi everyone,

I’m new to ValuePickr and to the world of Value Investing.
I have been following Vishal Khandelwal, Basant Maheshwari, Mehrab Irani, value-picks blogspot etc.
I am fascinated by the fact that even I can become a successful investor with experience, patience and hardwork.

What’s bothering me is the fact that I don’t have a network of friends who can give me stock ideas. And by the time I read it from blogs/magazines/paid subscriptions, it’s probably late. Also, that’s a kind of spoon feeding, i feel.

I want to develop a methodology which would help me i) pick stocks on my own, ii) do good (Philip Fisher type)research on them, and iii) have a clear understanding to decide when I should/shouldn’t sell them.

Now such a requirement may be satisfied by the following (according to me):

a. Hit and trial: Use screens, subscriptions, tv noise combined with the thoda-bohut financial statements’ analysis that I have learnt to ‘analyse’ and invest. When you go wrong, find out why you did…A tried and tested method which may take time but will make you a pakka investor!

b. Enrol for value investing courses like the following:

http://learning.equitymaster.com/equitymasters-secrets/
http://www.safalniveshak.com/mastermind/

c. Intern in an equity research firm
This would probably show me how the professionals do it. It may be a much more structured and refined way of analysing. It would teach me things like gathering information from other sources, looking at the bigger picture etc.

d. Read a lot of books (which I have already started)

Now, I’m in a dilemma as to which approach to follow! Or am i missing something Or have I exaggerated the whole process to make it look complex?

Looking for some inputs in this regard from the Valuepickr community. Please help.

Regards
Nikhil
Bangalore

1 Like

Nikhil,

Nice to see an young investor’s approach :).

From your internship question I am assuming you are still studying? I am also assuming its not a CFA line or even a MBA Finance line - else the questions posed may have been entirely different :). Will be good to let us know what you are doing currently.

1.The Bull market kind of frenzy that you are seeing now may be propelling you to think that you have to be early into an idea to be a successful investor!

2). That will come with time and experience and diligence, eventually. A network will also grow as you participate (first ask questions, then start contributing on existing ideas, take others info/ideas forward) more in communities like VP. As your contribution starts becoming valuable and starts getting noticed - people will reach out to you!

3). To be able to provide solid value however, you need to have a solid foundation and the discipline to stay honest to stated purpose - there are no shortcuts

4). Most new learners try to do too many things. I usually suggest - just take 1 stock idea you like and do a PHD on it - take a month, 2 months - but become the guy who knows every data point about the business/industry/competition that is available in public domain. Question all assumptions seniors may be making. Do a complete holistic stock analysis - so that there is nothing that a senior can ask - that you do not have the answer to. Read the investment classics to add rigour to your analysis.

5). Add solid value to the ongoing discussion into that business.

6). You will suddenly see that you now have your own comments and distinct thought process. You will be able to qualify what anyone is saying. You will be less over-whelmed. Seniors will find they cant pick much holes in your arguments

7). Time to look for a new promising idea :slight_smile:

I was a newcomer in 2008/9. I have successfully made that transition to become a full time investor just by following the above steps. Honestly there was (and is) nothing else - in continuously upping the learning curve.

There is this tried-and-tested VP process. There are no shortcuts. You got to grind through this.We have taken care to provide thescreening tools,analysis/valuation frameworks, list of must have investing books, the capital allocation section on advanced insights, and most important this wonderful community to help nurture your passion - together with other fellow learners.

Don’t fall into the usual trap of doing too many things. The best approach I have seen is to be able to stay away (only 10%-20% is Signal, 80-90% is anyway Noise) and focus on 1 single favourite idea that jells with you - do that PHD in that business - as I recommend and follow steps outlined.

Everything that a newcomer needs is probably there in VP - we have tried to capture back most of what we have learnt - the process and the insights, as we keep progressing in the investment journey. You don’t need to go anywhere much. Explore the site. There is GOLD here - literally. But will you have the sustained passion & the diligence to find it and help us hone it further?

Cheers.

16 Likes

Hello Donald,

Thanks for your quick and detailed response. It makes sense. I will go through this resource to improve my knowledge! Hope to interact more on this forum. Please feel free to correct me…

About me:
I am a mechanical engineering graduate. Was working in Bosch but left to do something related to Product Design. Right now, sitting at home and learning about Design and Value Investing.

Cheers!

Donald,

I am exactly in the same boat. “Most new learners try to do too many things.” I start with something, hear an idea through VP or other channels and jump to that and then to another and so on. The focus was missing and I have gone nowhere after several months of constant effort. Guess I will now shut down everything and focus on one single stock till I completely understand everything about it. Thank you so much for the guidance.

Cheers,
Sathya

1 Like

Hi Nikhil,

As far as I know, there are no shortcuts in stock market (i have just 2yr 8month exp in stock market, have not found one).

Experience are gained by being in the market, putting your own money, developing good network of friends, learning which are the category of folks to trusts, and whom to ignore, developing mental models, asking dumb questions, participating in discussion, tuning your brain to be calm/rational in ups and downs of the market, developing a niche (say a sector, or midcap/small cap, or choosing a investing approach like TA, techno-funda, graham’s value investing, moat based investing, peg based investing or a mixture of these, depending upon what you like amongst these), reading books, magazines, articles, AR concall transcripts and so on.

From the list, it will be pretty clear that, learning at stock market has to be a continuous process, with very high chance of mistake in initial period. So my advice will be start with small corpus of fund, and slowly increase it with time, so as to minimize the damage due to mistakes during initial phase.

I am quite skeptical about few of the courses listed by you, as I have seen these tutors analyze stock excellently and at last decided the stock overvalued, and it rising 2X/3X (i.e Cera sanitaryware). God save those who learn from these great masters :slight_smile:

Stock investing is way more than equity research. Plus equity research firm usually dont cover awesome small caps. Analysts are tuned for maximizing their profit, not to find next multibagger. They will tell you what to buy, but will not tell when to sell. So internship might be as helpfull as you wish.

The best learning you can do is to study under the greats, by reading books/articles/letters/AR written by/about them. The greats like Warren Buffet, Charlie Munger, Ben Graham, Pat Dorsey, Howard Mark, Phil Fisher, Ken Fisher, David Dreman, Sanjay Bakshi, Basant Maheswari, Mohnish Pabrai and so on.

The next best think you can do is study the messages of seniors (with proven track record) like Hitesh/Donald/Ayush and try to learn the approach in which they go about studying a stock and deciding when to buy/sell.

2 Likes

Sathya,

This is how I was in 2008. I would find merit in many ideas. i would immediately go to a few seniors I knew and they would easily pick holes in my arguments - I would neglect working capital, or cash flows or high debt or miss seeing something very obvious. Each time my investment thesis had positives but they also had holes - I found I just could not talk to seniors at their level :slight_smile:

And then I found the PAT Dorsey Book : 5 Rules for successful investing. It’s a mis-named book. It’s the only complete do-it-yourself practical handbook for wannabe analysts. It even provided stock analysis and valuation templates. What more did I need? I got hooked and spent a month studying and filling up the Template for Opto circuits - took me some 2 months - but boy, saying the learning curve was steep …is an understatement. [Opto Circuits Stock Analysis]

Suddenly I was on par with my some seniors - at least nothing they said spooked me - I knew the terms and their implications - the basics, and I had the data for whatever they asked. I may not have the insights they could provide but, no more could they pick random obvious holes in the investment thesis I then started putting forward. And along came Manjushree Technopack and Mayur Uniquoters, and the rest of the pack!

Every wannabe serious analyst - can replicate this - if there is sincerity of intent and single-mindedness in purpose. So can Nikhil and you Sathya. Just go for IT!

4 Likes

my two cents:

Bosch is, and is considered to be a great company with great returns over decades. you can even start from there, as you know the company, products, competitors etc. familiarity with a known company can be helpful in first company analysis.

or you can choose a valuepickr favourite. this way you can discuss your thesis with some seniors out here.

Yes Donald remember the Manjushree find.Lot of collaborative effort went into it & good profit as well.

Even now its has performed exceedingly well beyond our expectations.

@ Vivek Gautam - Those were exciting times. You could find gems at screaming undervaluation. Manjushree went up 3-4x in 3-4 months from 32 to 100. The business has continued scaling up leaving everyone behind - they are the largest in Siuth Asia - Mr Market taking it to now 300+ or 10x in 5 years. Even though we rejected Manjushree and moved on to much higher (ROCE - Cost of Capital) spread businesses like Mayur and Astral - which have certainly done better - who will not take a 10x in 5 years - much better than the 10x in 10 years that most folks are happy with.

Just goes to show if we are early into a stock idea, we just need to bet on honest management, who are good at execution, in a business that can scale (even if the economic characteristics are average).

@ Subash - You are right about no short cuts. But what you have listed will end up scaring off any newbie. Your list is a whole investing competence life journey … getting to decent competence level needs much lesser but single-minded focused effort.

@ Nikhil & Sathya -

below - only for consumption of the new learners :slight_smile:

My honest experience.

The reading list need not go beyond 3-4 books to reach decent competence level - where you can dissect any new promising opportunity - that will hold up to scrutiny from any seniors. Start with Peter Lynch which reads like a novel and dive into Pat Dorsey. Immediately take up 1 live stock/business idea for dissection. Along the way imbibe all that is there in the PAT Dorsey D-I-Y Template, and get into practicals - discuss the business/domain/competition/sustainability of competitive edge why or why not. If performance has been good/improving so far, why will the company be able to sustain - or not - that’s all that you need to really answer. From Intelligent Investor - just grasp the central concepts of Mr Market and Margin of Safety - get these two firmly embedded in your head. Everything else is already/better covered in the other texts mentioned. Get interested in the Business - not so much the stock.

I suggest please ignore big reading lists now for next 2-3 years. Get practical and more practical, churn more stocks and read more Annual Reports - 100s of them. Many learners prefer to read more investing tomes - which essentially rehash the same 4-5-6 basic principles in different insightful ways and read far too less ARs. That’s a big big mistake …and to my mind (intellectual, but) lazy effort. Once stuck in that rut of endless reading, they find it difficult to make the transition/connect the dots - from theoretical to practical constructs - which is really the essence - as any Senior Investor/Fund Manager will tell you.

Catching businesses in transition - is key to superior performance. That is what Ayush has taught me with endless patience. You don’t get a picture-perfect textbook case like Mayur often. Catching that business while in transition to the next level - having a hypothesis why for this business the ODDS are stacked in favour - will require you to connect the dots - transfer theoretical constructs to the practical level.

Connecting the dots - getting the 100’s of mental models in - that’s the ART side of Investing - will come only from churning more and more stocks/ideas/real life businesses in front of you. Along the way - sure do read up a couple of nice intellectual books - to spur and broaden your thinking - again much of which we continue to capture at VP Capital Allocation forums - as we are maturing/refining what we have done in previous years, and progressing on the journey!. Business Value Drivers, Capital Allocation, and the ART of Valuation threads capture I would say 90% of our learning in last 4-5 years - unfortunately, you don’t find most of these central concepts in the investing textbooks listed. Yet, no regular ValuePickr will deny that these have been central to the VP Portfolio selections/performance - these are all that really mattered.

Pardon my rants. This is a favourite rant of mine - as I See 80-90% of folks don’t take the trouble of going deep into a business or a few businesses = and therefore continue growing every 6 months , a year. Rather they keep on spraying the same generalisations around or quote Guruspeak in sometimes right and sometimes entirely the wrong context! And we are dismayed to see the lack of growth.

No need for any defense from anyone on this. This is only aimed at wannabe analysts. Those who think they can do as good as any analyst in the market. Don’t quote back full time job and lack of time. Its never a lack of time - it’s your single-minded focus - and keeping things simple. Investing is pretty simple end of the day - just 5-6 central concepts - we somehow love making things complicated :wink:

If you follow the process, and are not in a hurry ( to make super-normal profits), you will be able to stay away from fear and greed. I don’t agree you have to make lot of mistakes to learn. A few mistakes will be inevitable when our temperament gets the better of our better judgement - and we jump in fear and greed.

Most of the mistakes come from fear and greed - the more you will take it slow, stay true to the process, stay humble and open to learn, respect what Mr Market is telling you, and continuously seek out folks more experienced/smarter than you - you will commit very few mistakes. Beginners luck would be with you - believe in it :slight_smile:

I was fortunate to have folks like Ayush and Hitesh and Abhishek around me when we started, and Mr D & Mr M whom we sought out. Our journey is all documented here in the various stock discussion threads. I made few mistakes - the first was Reliance Power IPO (pure humongous greed and paid a good price for that), Laxmi Energy & Foods (greed), Riddhi Siddhi Gluco Biols (greed+inability to dissect the real scenario playing out). You get the picture!

12 Likes

Donald,

You have beautifully captured the real reason behind why not everyone becomes a Donald/Hitesh/Ayush. People can make money by ‘cloning’ as Mohnish Pabrai says or by being in the market at the right time in any stock for that matter. I don’t mean to say that is wrong but the real happiness lies in the journey. Going the distance yourself. That perhaps truly differentiate the wheat from the chaff.

I have seen that it is much easier to connect the dots looking backwards than to do the same looking forwards. I don’t think anyone will be able to look into the future but the odds certainly stack up in one’s favour with experience and wisdom. ‘Get Practical’ is going to be my focus for the next few months. Many people start their baby steps by very few reach the finish line. Hope I wouldn’t be lost midway. Thanks again for helping us understand that stock picking is more of a skill than a talent, which can be honed.

PS: My first step should be to get rid of my OCD to check VP every other minute.

1 Like

Dear Donald,

Thank you for these valuable insights. For a beginner like me, its invaluable. I recently started with a small corpus to invest. I have made money but it has been at the expense valuable time elsewhere.

With limited background in finance (I am in HR), I picked up few tips on ROE and ROCE and started screening them on screener.in. Soon realized that it would not help much to just look at the numbers as data only throws up the past and not future performance. Even bought subscriptions at top sites, but they too did not give much insight into why a particular stock will go up.

Recently, I lost much of my earnings and back to almost square one. It was by painful experience that i have learnt to be aware of fear and greed as you have rightly pointed out.

It is this learning/experience that I need to captalize on and ensure that thoughtful investments are made after due study, research, knowing the industry/business. Realize the importance of the books that I bought and not read. :frowning:

Look forward to gaining from this wealth of knowledge at VP.

Cheers!

Babu

hi nikhil

Welcome to valuepickr.

coming to your query I think this is the problem with almost all wannabe investors who want to learn and then invest wisely

Personally I think forums like VP provide perfect learning platform for guys like u who wants to start equity investing after doing his own research.

I learned most of my investing craft from forums and books like the one described by donald and the other which I consider my own bhagwad gita which is One Up on Wall Street. by Peter Lynch.

A combination of the two books should help you out by…

1). Lynch’s book will provide you a framework on how to find out good stocks

2). Dorsey book will teach you how to analyse the stocks you have found out.

Regarding the query of being early in an idea it is not necessary to be too early in all ideas to make big bucks.

What is important is to ride the full journey of a great company and even more important is to allocate a sufficient enough sum to make the journey fruitful besides being enjoyable.

You can read through the entire threads of various success stories like ajanta/kaveri/astral/mps/mayur/atul auto/thinksoft/rs soft/PIinds etc and many more as well as the flop stories like riddhi siddhi/lakshmi energy so that you get an idea about how investors think at various stages of journey.

3 Likes

I am new to this forum but not new to investments and stock market.

Donald / Hitesh have put the basics very succinctly and with lots of clarity. There is no alternative to do it yourself … Start small, learn from vicarious experiences and read lots of Annual Reports.

However, I think few other books apart from those two mentioned can be of possible help but you need to decide based on your time, interest and inclination. These helped me quite well…

  1. Intelligent Investor — Ben Graham

  2. Technical Analysis of Stock Trends — Edwards & Magee

  3. Poor Charlie’s Almanac — Edited by Peter Kaufman

This post not for recommending these books but for information. I personally had little interaction with stock market related people till very recently for my other vocations and lack of time and opportunity. I mostly learned from books and by talking to handful of like minded people totally unrelated to India’s mainstream stock market. So, I can’t underestimate value of books and annual reports.

Lots of books on Philosophy / Classic Literature / Behavioural Psychology can give one lots of insight into life which at times very helpful in an indirect way.

I have no words to describe how I feel now by seeing all your responses! Thank you so much for guiding the beginners.

@Donald: I have been going through this site and I see “GOLD”! I had been missing a lot by not knowing about this place!

First steps:
1). Re-read 'One Up’
2). Order Dorsey’s book
3). Read more ARs

Cheers!
Nikhil

Hi folks

This is my first log

I was into equities , when DMF (domestic mutual funds) where in nascent stage of take off, and only good investment database was capitaonline which i feel still good database;

I had researched few stocks , even today also quality stocks like Food Speciality Limited, Ranbaxy, Jamna Auto , Triveni Engg , all delhi based companies based on study of following factors :

Annual sales growth, product premia, brand , industry and PE and payout ratio and above all , integrity of promotors and commitment

The thought process was , that south based companies are generally low profile, totally ethical, highly committed to growth of companies, not botheredabout BSE /NSE and treated the shareholders as part of family and shared theearningswith all shareholders , which i am sure still holds good , may be slightly diluted

I feel the core factors determining a future pick , still remains :

a) commitment of promoters to the company growth

b) promoters stake

c) industry ,company positioning at any point in time

d) then comes earnings, future growth and distribution

One stock , which i request the forum to study is ISGEC heavy Engg Co Ltd

I have linked their Financial analysis for your info

http://www.moneyworks4me.com/indianstocks/small-cap/capital-goods-industrial-consumables/engineering-industrial-equipments/isgec-heavy-engg/company-info#decision-maker-anchor-link

Dis: I have good exposure in this company over last 3 years and it has given av 55% return in last three years

Kalyani

hi[ Comment too short ]

Donaldji, as a part of my learning process, is there any way I can access your Opto Circuits research template.

Thank you so much for your and hiteshji’s precious feedback in this thread!!

Hi Donald and Hitesh Sir,

I am a new investor and just like Nikhil and Sathya I was trying to grab too many things at once.After reading this post , I am trying to stop all such activities and started reading Pat Dorsey’s book.For the last three weeks I am filling up a template imbibing all of Pat Dorsey’s idea and just like donald ji did it for opto circuits, I have taken Kitex garments as the sample (Also trying to analyze why this idea looked so promising in 2012 to valuepickrs by reading that thread and AR).

But when I am trying to fill up the template, i am facing some challenges as not all required data mentioned in the book is available at a single place/website.For Example Short Term borrowing /Long Term borrowing can’t be found out from money control balance sheet, I am not able to find which column exactly refers to trade payables etc.However when I look at the A.R all these details are available the way i expect it to be.

I want to know

1)If there is any website/software you use that can give all these data in detail.I tried to get the data from all A.R but sometimes 10 year A.R is not available for all companies.

2)Is it necessary to go through every single ‘note’ against the balance sheet,P&L statement and dissect all the A.R in every way possible? I am not from Finance background but have bought a basic finance book after reading this thread to learn all basic financial terms and their implications, however i feel this way it will take very long time to analyze even a single company and then i may find it not worth investing.Do you follow some specific process here for analysis of 10 year data?

I hope you would notice this thread . Thanks a lot for your inputs in this thread and changing the way i treated stocks.

Nishant & Anindya,

Thanks for writing in - on the quest for in-depth research work. First please drop the Sir & the Jis - we at VP like to be addressed by first names - we know we are all fellow-learners seeking to become more refined investors with more practice, sharing and enthusiasm that we can bring to the craft.

Attached is Opto Circuits Analysis Note -prepared by me in Dec 2008. This was a long time back - not sure if this was the latest most refined version. But it sure will do to show you - that something like this can be prepared in 2-3 months - which takes care to stick to a holistic template and not miss anything that the Guru (in this case PAT Dorsey) might have asked you to examine.

I was completely theoretical at that time, just read the Intelligent Investor, Peter Lynch, Phil Fischer - so there might be simplistic or bookish conclusions - please ignore them and excuse.

Going after preparing this in-depth report helped me speed up my learning curve like nothing else. It also helped me get connected with folks like Ayush, Mr D and Mr M - with whom I suddenly saw I was able to keep up an intelligent conversation - talk somewhat at their level that is - without feeling overwhelmed.

Anindya - there is no short cut to compiling data. I will strongly advise anyone to use only the ARs when starting out! They are the most reliable source of data - and in the process of extracting all required data, you will learn how to read Annual Reports comprehensively. Do not take the easy way out!

Disclosure: Opto Circuits was a good investment in 2009 when it went up by 4x from 75 to 300. And then for 2 years it stayed in the 250-300 range. Ayush’s Dad got me out of my “fascination” and love for this company, its management and its glamorous products - by pointing out this fact. That Opto was in the 250-330 range in 2007, 2008, crashed and recovered back by 2009 end, and again in 250-300 range in 2010, and 2011. No one has made any money in this company in last 5 years if they hadn’t bought at the lowest in 2009 (like me).

His famous words "Mr Market is telling you something; please respect that; please look at Opto’s BS and P&L carefully was his advise. I looked, dissected (we were better at the game through 3 years of constant practice by then) and promptly got out in 2011 (and there were many old-timers who stubbornly defended the company/management and refused to see the hidden and not-so-hidden issues and kept paying the price as the stock continued to get hammered to low double digits. I had covered some points somewhere but cant find the right thread. This one has some of the things that went wrong or were wrong http://www.valuepickr.com/forum/company-q-a/892683801. There was one report by Keshav Prabhu I think that highlighted many discrepancies in Accounting too.

Do not be misled by my (dated) report and the facts cited :). We didn’t know how to do a good forensic audit then; also the continuing hi-tech acquisitions (without expanding Management bandwidth) killed the goose.

Opto_Circuits_Stock_Analysis_151208.pdf (511 KB)

4 Likes

Thanks a lot Donald.

This template looks like exactly what i was looking for. Will go through this in detail.