There is more to Stock Picking...

Stock picking is an art that looks pretty easy and with the option of doing it on your fingertips it appears all the more simple. A lot of retail investors get introduced into the market during a euphoric bull run and they are straightforward taught FOMO(fear of missing out). They invest a little and its runs up and they try again and it everything goes up and until it doesn't. By the time they realize whats going on, they are stripped of their investments and are in shock. What did they learn - FOMO, Buy at dips, Get out of the market ASAP, Buy mindlessly and sell, somebody got lucky and made a retirement during the bull run, and after a year may be how it effects their taxes returns. All the wrong lessons one could learn.

What you have learnt is not investing, it can be called gambling. This correctly portrays the notion of stock market as a casino.

What's investing:

Investing can be accurately described as buying an asset(Example a piece of land/farm) that has the ability to produce cash in return in the future. Success in investing depends on various factors:

1) Did you buy the asset at a discount?

2) Did you buy a lot of it?

3) Is there a trigger that can increase the value of your asset?

4) Are you willing to wait until the asset realizes its full potential?

Now the land transaction doesn't happen in the stock market where you can make a sale every second, but if it was would you be willing to sell your land every other minute based on the price fluctuation. Obviously no! You wouldn't because its something which is yours and you can see it and feel it and you are the proud owner of that land. But with stock market investing you don't feel the investment and you are just dealing with a ticker. You don't think like an Owner - Thats the basis of the problem or the losses. (This analogy is inspired by Warren's speech in one of his talks)

Act like an owner if you want to succeed as a stock picker.

Smart Investing:

Investing in stock market is about buying a business that has potential to grow its earnings in the upcoming years. It's about identifying an opportunities thats not seen to the regular crowd. It's about learning about an upcoming event that is still at its infancy. Having an edge is the secret to making consistent money in the stock market. Investing is about pushing for excellence in your thought process and effort.

Investing is not about buying for a day or swinging for a month. It's not about looking at the prices everyday or modify your positions based on the market sentiments. It's not about buying a stock because your neighbor or a friend or a family member or an influencer said so. Investing is not trying to identify a crypto at say .00000001 and wait for it to become $1. Investing is not a lottery ticket that will make you all the money for retirement in a couple of months. Investing is not about blaming markets for your foolishness.

Investing is about understanding what works for you and what's your expected rate of returns. It's about knowing where you are in your life and what is your savings and how much risk you can take?

Your Behavior Matters:

Since investing in stocks is all digital and you can buy or sell any assets in your fingertips : Controlling you emotions/actions is the most important feature for you to be successful. Knowing oneself throughly will take you a long way in stock market. The reason you make money is you and the reason you lose money is you. Every investor will have different levels of emotional control, the more you are aware of your actions the better you can manage your own behavior.

Investing is all about you.

How can you become better at managing yourself. Let's see if you are you ready for investing?:

1. Do you have emergency funds saved?

2. Do you have a job thats stable?

3. Can you control your actions when in panic and be calm?

4. Hope you are a risk taker but not a gambler.

5. Ready to put in effort to learn a business.

6. Against taking leverage

If your answer is 'Yes' to all of the above questions then you can consider picking stocks. If answer is 'No' to any of the above question then you should look at Indexing and not put yourself in an uncomfortable risky situation where odds of succeeding is against you.

Here are some steps that you can take to equip yourself for investing -

First and foremost - Learn from the Gurus:

There are only a select set of famous successful investing millionaires\billionaires in this world. There are a lot of materials available on each of them, just read about their life, listen to their interviews, analyze their stock picks and the rational behind their picks. read their investment letters or a book about them.

For beginners: Some of the my favorite gurus who can provide valuable learnings - Warren Buffet, Charlie Munger, Peter Lynch, Li Lu, Mohnish Pabrai, Seth Klarman, Howard Marks, Bill Ackman and Micheal Burry

Materials: Look for all the speeches by the gurus on YouTube starting from the earliest material that you can find on them - Tons and Tons of valuable learnings on each of them are freely available.

Concepts to learn: MOAT, Pricing Power, Analyzing a Management, Importance of Habits in Consumer, Margin of Safety, Circle of Competence, Importance of being concentrated, How to act during market correction, Importance of deploying huge sums, When to sell a stock, When to hold a stock, Greatest mistake of the gurus and their learnings, reading 10-Ks of the companies and their competitors.

Don't copy the Gurus:

Learning the concepts/mindset are important here and not copying their investments. It's about gathering knowledge and being cognizant of the strategies of investing. Spend at-least 6 months everyday listening to the interesting stories of the gurus. This will give you the mindset required for stock picking. Repeating the theories and training your mind will help you think differently from the crowd. Invest in your learning.

Also, your goals are different that the gurus(usually old folks), they have made it big already and might want to play safe or focus on risk management more. So copying their investment might not align with your expectations. Also, they can't buy small companies because of the large sums of capital they manage, you can and should take interest in areas which are less explored for higher returns.

Concentrated or Diversification:

As individual investor, anything over 5 stocks in your portfolio is too much. If you are retired then you should have 5 stocks in your portfolio and if you are beginner then having 2 or 3 is more than enough to get insanely rich.

The reason why I limit the stock count to less than 5 are simple:

1. You are individual who would get paid bimonthly or monthly. And having 10 to 15 positions would only confuse you more.

2. You cant focus 10 to 15 business updates along with your day job

3. You will lose track of your best ideas and would unnecessarily reposition your portfolio in a downturn.

4. You may sell your winners to average down your loser - Bad Strategy

5. Know that diversification doesn't reduce the risk of markets, but it does reduce your returns.

Diversification is for ignorants, it's not a strategy to enhance your returns.

Go big:

If you find an opportunity of a lifetime where the stock that you think is extremely mispriced and you deploy 5% of your wealth in it, then it's a big mistake. You have to take your chances and go big when the odds are in your favor. Standing alone might be a scary situation and you may look like a fool in near term and nobody would be talking about your pick. This can happen when the upside in your stock pick is extraordinary. Please ensure you know about the bull & bear thesis about the stock and the reason why its cheap and take your assessment of when the issue might be resolved.

Always go big on the positions that you are totally convinced when the odds of you making money are high and downside is limited.

Time in the market :

When you invest in a stock you are looking for a story to play out, you are either looking for something to turnaround or looking for something thats going to increase the free cash flow of the company or looking for the next big thing. But understand that timing of your story to play out is NOT in your hand. You are in it for a long haul and it may not play within the time period you want your returns. But believing in your research and focusing on the business updates will help you confirm your thesis when things are not going your way. This is the testing phase where you might be thinking about timing the market if your stock isn't going up. This is a phase where you will have to really focus on long term and avoid unnecessary buying and selling.

Beginners stock picking mistakes to avoid:

1. Buying a business at a premium and not on a discount.

2. Focusing on more than one business when you start - having more than one stock in the first year of investment is a huge mistake.

3. Being confused and not building a position on your best idea.

4. Not reading bear and bull thesis of your investment.

5. Not reading 10-k of the company and also its competitors to understand the sector.

6. Selling on a pop or on a downturn, just to get back in at a higher price point.

7. Switch strategies when your investment is not moving ahead.

8. Buying companies with unmanageable debt.

9. Choosing a business in a sector that is dying; choose something that will be long lasting or a future growth sector.

How my method helped me reach my goal:

I focused on a business (turnaround one) and kept accumulating it from $13 to $5 over a course of one and half year. It fell more than 50% from when I started accumulating. And I kept buying with every pay check and was able to get my average price to $7. Then in an instant the trigger the investment played out and the company went to $21. I made a 300% on the position that I built on for a year +. My returns were close to twice my annual salary because my position was huge. I read any and every piece of material on that business for a year and a half. It was the most satisfying feeling because I knew the company inside out and was sure it will rerate. And I knew I had arrived as an investor. If you want to know more about it you can read - https://www.investingrational.com/post/path-to-your-first-100k-for-beginners-in-stock-market

Thanks for reading my thoughts on stock picking. You can surely make it big, just enjoy the process of investing and be smart about how you want to succeed in next 10 yrs time; just ignore the short term noise.

Good luck!