The story in stock market investing is simple: You do not make money all the time, in every single stock. Those who have generated wealth have taken decades including the likes of Warren Buffet or and billionaire investor Rakesh Jhujhunwala.
Look for leaders in the sector
During the boom period of 2008 investors chased all kinds of stocks. But, they hardly went for leaders from the sector. Now, let's say an investors bought heavily into two infrastructure companies in 2008 - one was L&T and the other was Jaiprakash Associates.
Eight years down the line he realises that L&T has generated more wealth and he has perhaps lost money in Jaiprakash Associates. Stocks from leaders could fall if there is a recession or global calamity, but they are back on their feet and they ultimately make money for shareholders. HUL, ACC, ICICI bank are classic examples.
Look at the company's potential for growth
Billionaire investor Rakesh Jhunjhunwala successfully identified Titan. At the time he looked at the potential for growth and the sound promoters of the company. He bought a lot of shares and held them for years. Titan has generated wealth for shareholders like very few companies have. The mantra was to look at the company's potential and the huge population that the company would eventually cater to. The company has slowly diversified from watches, to jewellery and now spectacles. The growth momentum continues.
Avoid Company's With Heavy debt
Just ignore companies that are heavily debt laden. There are many companies from the infrastructure and steel sector are heavily laden with debt. Over a period of time you realise that these are the very companies that fail to generate much wealth as compared to companies that have negligible debt or our debt laden. Most companies with heavy debt come crashing down and few examples include Kingfisher Airlines.
Look for Positive Cash Flows
The best thing to look at is the cash flows of a company. Positive cash flows means that the company's prospects are bright. On the hand avoid companies that have negative cash flows.
Promoter Background Most Important
While the past track record maybe an indication of future performance also look at the promoters. Are their other companies saddled with debt? Do they have clarity of vision? Have they unsuccessfully diversified into other areas? Have they pledged their shares? These are some of the important questions to ask yourself.
While there are million other things including fundamental and technical analysis to undertake while evaluating a stock, if the above basics are not in place, there would be no point in analysis of a stock.