Trading Rule – “Stock Market Research is all around you”

THE STANDARD REFRAIN FROM A LOT OF INVESTORS IS THAT THEY DO NOT UNDERSTAND EQUITY RESEARCH AS IT IS A FAIRLY ESOTERIC SUBJECT. YES, IF YOU PURELY LOOK AT RESEARCH FROM THE POINT OF VIEW OF TOMES, MODELS, CASH FLOW PROJECTIONS, MARKET ALGORITHMS AND CHARTS IT DOES SOUND QUITE COMPLEX. BUT THE REAL STORIES IN THE MARKET ARE NORMALLY THE OBVIOUS ONES. YOU DO NOT HAVE TO BE AN EXPERT IN VALUATION MODELS TO RESEARCH COMPANIES. YOU JUST NEED TO HAVE A CURIOUS MIND AND HAVE THE ABILITY TO KEEP YOUR EYES AND EARS OPEN…

HOW SOFTWARE WAS A MUG’S GAME IN THE 1990s…

The big push to software companies like Infosys and Wipro came in the late 1990s when the global corporations got the first taste of India’s ability to execute quality solutions for the Y2K project without time and cost overruns. But for the discerning investor the hints were there all along. You just needed to look at the investments that IT companies were making in acquiring offices and expanding their operations. On one hand, the government was going out of the way doling out tax incentives to IT companies to capitalize on the US demand. On the other hand, the artificially weak rupee was proving to be a boon for software exports. You hardly required complex models or cash flow projections to understand this story. You just had to keep your eyes and ears open…

HOW DIGITIZATION IS BECOMING A REAL STORY NOW…

Let us, for the time being, forget about what happened in India 20 years back. What is the big trend that we are sitting on? OK, what are the big trends that we have seen in the last 3 years. Firstly, the tremendous focus on financial inclusion through the spread of bank accounts and Aadhar has been the big story in the last 3 years. Then we have seen a rapid spread in mobile commerce and rural areas are fast catching on to the IT bandwagon. Cheap data plans are only adding to the frenzy. That has created the perfect platform for digital money. The trigger for digital money came from demonetization and it is now up to the wisdom of companies who are into digital hardware, digital software and connectivity services to make the most of this trend. Here again, identifying these companies does not require any great rocket science. All it requires is a curious mind and your ability to keep your eyes and ears open. Try it, this time around!

“I got my best and most productive investment ideas by simply watching people at malls, cinema halls and markets doing strange things” – Peter Lynch  

6 WAYS TO IDENTIFY A BIG INVESTMENT IDEA WITH SIMPLE RESEARCH…

  1. Have you ever been to a mall and seen people crowding round certain products? Ever wondered why they are doing it? Something like what happened when Apple I-Phones were first launched in 2007. People in the world had never seen anything close to that and the impact was visible in the next few years in the earnings and the stock price of Apple. A company that was almost bankrupt in 1997 could now end up being the first Trillion Dollar company. Just imagine how much money you could have made if you had spotted the trend.
  2. When you spot a trend, ask yourself a question on who will be the big beneficiaries. In case of demonetization, the obvious beneficiaries were the companies providing support services for digitization. When people flock to buy a product at a particular mall, then the mall or the seller is also the beneficiary. For example, when people crowd to malls to buy groceries cheap, the big beneficiary is someone like D-Mart. Similarly, when Apple I-Phone is a success in India, Redington is a big beneficiary. These are the companies that you need to focus on from an investment perspective…
  3. Don’t forget the Levi Strauss effect. When there was the big Gold Rush in America in the early 19th century, Levi Strauss calculated that irrespective of whether people strike gold or not, they will still require rough jeans to prospect for gold. That is how you actually focus your attention on a rather unrelated beneficiary of a trend.
  4. Not all trends are money spinners. Great ideas take time to come to fruition and actually generate shareholder returns. It took over 20 years for companies like Infosys and Wipro to attain economies of scale and be able to bring their costs down to a level wherein they could actually bid for global projects. But when that happened, the returns were humongous. You have to calculate how much time you are willing to wait on the stock.
  5. You get a lot of research ideas by asking questions. If you see customers crowding around a product, ask them why. If you find people shifting from traditional cinema halls to multiplexes, again ask people why. These questions can give you invaluable insights about new trends and then you can extrapolate to equities.
  6. We normally miss out the most obvious sources of information and insights into stocks. Talk to your spouse and she can give you invaluable insights about retail trends. Your son or daughter may give you superb insights into some new technology gizmo which you are not comfortable with. Your colleagues in office can give you sharp insights into competition and a variety of products in the market. Each of them can give research ideas.

RESEARCH IDEAS ARE ALL AROUND YOU

That is the moral of the story. Your next multi-bagger stock may not be about fantastic models and cash flow projections. You can get these ideas by just looking around. Talk to people around you and ask questions. Your next multi-bagger may be round the corner.

 

 

 

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