While standing in the checkout line of a supermarket I visited yesterday evening, I saw a couple of kids begging their parents to buy them some over-priced chocolates and toys, which I believe were purposely placed there to create “impulse” among kids.
Like me, even you must have noticed how supermarkets place such goods just at the checkout, so that the customer, already tired of roaming around the marketplace, buys these easy-to-be-picked, but expensive items.
You can get a lot of that similar stuff throughout the market far cheaper, but then having them at the checkout is a great way the store manager can lead you to overpay.
What is more, at most times he succeeds in doing that by convincing your emotional side into buying something ‘without much effort’ (like I bought a magazine, which I later realized was also available at my library!).
Anyways, why am I telling you all this is because the stock market is very much like supermarkets, where most investors buy any stuff (stocks) on impulse, not willing to do the hard work of researching what’s available at a bargain.
What is more, there is no dearth of such “impulse-creating” points of contact for the investor – business channels, magazines, newspapers…look anywhere and you will find a flood of “wonderful” stock stories quite often.
You’ll read about how great this company is, and how its price is quite attractive after the recent crash. The story will make you agree with it so completely that you’re ready to buy the stock the very next moment.
Maybe, one such story will also tell you why time is limited for you to buy the stock before it comes on big investors’ radar, or before it rises in price. Of course you want to buy it before this happens.
The problem is – buying stocks on impulse is exactly like buying stuff in the supermarket on impulse.
The stock may be good (or in most cases, it may be bad), but if you don’t do your homework carefully before buying it, then you are simply leaving it on luck that the investment works out. I’ve known so many people who have purchased stocks only to regret later.
So what’s the solution to get away from impulsive stock buying…especially when markets fall and all stocks appear attractive?
Here’s one way suggested by the greatest of investors like Warren Buffett and Sir John Templeton.
Make a “Stock Watchlist”
This is one of the key lessons of sensible investing that I’ve learnt from following these great investors, and that I’ve been practicing over the past few years.
A watchlist – of stocks I would buy when they fall to me comfortable prices – play a very important role in an investor’s long term success.
This is because when you have a ready list of stocks that you have researched but can’t buy because they are trading above your comfortable buying prices, you are ready to pounce on them after they fall to your desired levels during a market crash (while other investors are still wondering where to look for and what to buy).
A watchlist also saves you the embarrassment of buying stocks on impulse during a market crash (given so many ‘attractive stock’ stories floating around) and then realizing that you made a mistake in choosing some wrong businesses.
So it’s important to create a watchlist of stocks you would buy when they fall to your desired levels. These may be a list of dividend stocks, or a list of companies that promise great growth in the future but are just suffering a temporary slowdown in their sales and profits.
A watchlist is also important when you’ve found a great company to invest in, but don’t have the ready cash to invest at the moment. I won’t suggest you to borrow money and then invest in such stocks – as this is dangerous if your stocks continue to fall – however attractive the opportunity.
Your core idea of creating a watchlist must be to be ready with a list of great companies that are close to being good investments, but you want to hold off for a while.
One of my investing rules is that I never invest in a company that was not already on my watchlist. If I see an investment that looks very attractive, I put it on my watchlist and think it over for a bit.
This thinking process sometimes takes a week or even a month. But a stock has to first come on my watchlist before it comes in my portfolio.
Watch your watchlist
While I have talked about the positive side of having a ready watchlist of good stocks you would want to buy at the right prices, there is a negative side of keeping a watchlist. Yes, there is one!
Just because you have a ready watchlist, when a stock from that list falls in price and reaches your comfortable buying level, you may not look at the company with fresh eyes.
This can be dangerous, because the business – that you had originally researched while including it in the watchlist – might have changed over a period of time.
It might have become more competitive, or the company might be facing a new challenge that wasn’t there when you had researched it originally and found it worthy of having in your watchlist.
So the idea here is that, even if you keep a watchlist, whenever a stock falls to your buying levels, always re-look at the business to understand whether everything is fine fundamentally with it.
A major change in the business may make it much more or less valuable, so a major revision in your thinking is necessary.
So don’t just re-look and act on your watchlist. Also re-look at the business whose stock you are planning to buy…for it might be less or more attractive than you might be thinking.
My personal stock watchlist
Here are 10 stocks that I have on my watchlist as of now. Some of these are above my comfortable buying prices, so I will wait for them to fall more.
Then there are others, which are below my comfortable buying prices but remain on my watchlist because I don’t have the necessary cash to buy them at this time (now this is forcing me to think towards launching some paid services on Safal Niveshak, that bring in some cash to invest in these stocks :-)).
* Intrinsic Value (IV) is assuming 25% Margin of Safety on the higher range of my calculations; # 8-Year CAGR for Infosys is for FY04-FY12; Avg. P/E data for NHPC and SJVN are for past 2 and 1 years, since their respective listings; $ Premium to IV indicates that the stock price is higher than the IV, and discount means that stock price is lower than IV; @ EBIDTA is earnings before interest, tax, depreciation & amortization, and represents a company’s operating profitability; CAGR is compounded annual growth rate;
Data Source: Ace Equity: Source for IV: Safal Niveshak Research
You can read my analyses on Infosys, Clariant Chemicals, Graphite India, Balmer Lawrie, and BHEL. I will write about some of the rest over the next few weeks.
Anyways, like I suggested while sharing my personal stock portfolio with you in March, I would again warn you to look at the above watchlist for ‘entertainment purposes only’.
Your personal investing style will be different from mine, and so will be your risk-taking capability, financial liabilities, and investment time horizon.
Thus, I won’t suggest you to blindly go ahead and buy the stocks from the above watchlist (or even include these in your personal watchlist)…for it can be dangerous to your personal investment returns.
Instead, do your own research (from the emails I’ve received over the past few days, some of you are already working hard on this front, which makes me very happy). I can definitely help you in that process.