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The ultimate goal of stocks-investing you need to know first

Published : October 14, 2019

The ultimate goal of stocks-investing you need to know

Future is future, mysteriously unknown and insecure to each one of us. No matter how far we go with our lives there is only one way to carry it on. Hope!!! Hope for a better tomorrow, along with a desire to work endlessly towards making it secure. Future of not only us but also of our loved ones. Furthermore, when it comes to financial security, all of us put extra caution. What is ironic that theoretically, we all pretend to understand the risk of unknown future to proceed with and act best to avoid it in the due course. Yet we fail. We all come across financial scarcity at one or other point in our lives. And here is what makes stocks-investing more appealing option to secure the unsecured future.

The greatest of all which makes one opt-out for stocks in their portfolio, especially investors in India is what to buy and when. Not only in India, but it’s also a global hustle. Here in this article, I will put some light on how to figure out what kind of stocks one should look for one’s portfolio. After that will focus some light on the ultimate goal of stocks-investing from a retail investor perspective. This will help you understand how long you need to hold any stock in your portfolio. At last, will discuss briefly on how to make money by investing in stocks at all. So, what are waiting for? Let’s get started. 

Deciding which stocks might be worth owning

Determining which stocks you need to hold in an investment portfolio is going to depend upon numerous factors. As an absolute beginner, you might commit an error by considering that the objective of any given stock portfolio is to maximize absolute returns. However, this is not the fact all the time. There are other objects for having a stock in your portfolio. 

In some cases, it might be to attempt to achieve satisfactory returns while minimizing risk. While in other cases, it might be to attempt to increase cash income by focusing on higher-than-average-yielding securities. Securities such as blue-chip companies with high dividend yields. Yet another case will be to pick some penny stocks, in a hope to make a turnaround and getting a multi-bagger in your portfolio. 

In fact, this is the most crucial step forward for any beginner, wishing to enter stocks-investing business. You have money and you have a motive but what really matters is to decide beforehand that what for you need to invest in stocks.

Value investing philosophy that every beginner must stick to

As a steadfast believer in a philosophy known as value investing, I spend most of my day looking for companies that have one or more of a handful of characteristics. These characteristics might include things such as:

  • Stocks of businesses that possess a long, established history of sustained or increasing profitability through an entire business cycle, which includes at least one recession.
  • Stocks of businesses that have shareholder-friendly management and Board of Directors willing to return excess capital to owners through ever-increasing dividends and share repurchases. (A share repurchase program is when a company buys back its own stock, reducing the total shares outstanding. This means future profits and losses are divided among fewer shares.)
  • Stocks of businesses that have high returns on tangible capital (meaning it doesn’t take a lot of investment in property, plant, and equipment, or large amounts of restricted working capital, to generate a dollar of earnings).
  • The stocks of businesses that have some sort of significant competitive advantage that makes it difficult for competitors to unseat the enterprises.
  • Stocks of businesses that are trading at cyclically-adjusted low p/e ratios, PEG ratios, and/or dividend-adjusted PEG ratios.

We then look at how different stocks fit together as part of an overall portfolio. You wouldn’t want all of your money in, say, banking or industrial manufacturing. Rather, you want to look for ways to attempt to offset things like correlated risk.

What is the ultimate goal of investing in stocks?

As a wise investor you must understand that the end game of holding up of a stock as an owner ends up with a collection of wonderful businesses that generates cash enough that you can enjoy the rest of your life.

Goal 1 # Invest time in picking companies for investment 

In fact, I would go so far to argue that a great investment in stocks is not a company you should buy at one price and quickly sell at another in hope for an outsized profit in a short amount of time. Rather, one that you can buy and then sit on it for a really long time , say for 10 years or above. The underlying earnings per share of such hidden gem should continue to grow even while the stock price itself remain volatile over said period of time.

You must spend your time studying and analysing stocks, before acquiring to sat on it for decades. You must develop keen eyes enough in finding businesses that you want to acquire, businesses that others would consider to be boring, but that had real sales with real profits.

So, this would be your first goal of stocks investing. You should consider investing your precious time spending with studying details about companies you willing to risk your money with.

Goal 2 # Diversify your money in different stocks

It is very important to understand that there are no investments that will make you rich overnight. You should have patience, a lot of patience.  One should buy good stocks over period of time. And lock them away and allowing the time to do the heavy lifting. What you must really care about is that you should never put all your money in a single enterprise. This will help you outsmart the default risk. If one or more failed, the others will keep churning out increasing the intrinsic value of rest of your holdings.

With good diversification over period of time you can indirectly enjoying the fruits from the companies you might own that sell jet engines, insurance policies, chocolate bars, automobiles, coffee, tea, soda, hot cocoa, elevators, escalators, doughnuts, ice cream, oil, natural gas, mortgages, credit cards, student loans, athletic shoes, automobile parks, whiskey, vodka, wind turbines, lumber, diamond rings, watches, freight and logistic services, spices, pharmaceuticals, and much, much more. That is the power of investing in stocks.

Financial goals with risk apatite and kind of stock picking 

Next to above mentioned goals you must have enough faith in your pick to hold it for long enough to be worth it.  The last but the very important goal of stock investing is the timing to reach your financial goals.

You need to figure out whether your goal is to retire in the next 10 years. Either you want to build a corpus for your kids higher education or marriage. Or you need to buy a home or a car in the near future. Even if you want to inherit your kids with a fortune after you would be wise goal. Is’t it?

The goal of determining the length of time you have before you need the money from your stocks investing. This helps determine the type of stocks you should buy. 

So here are few time tested guidelines for choosing the kind of stocks best suited depending on duration of holding stocks depending on the willingness to take the amount of risk. Remember investing in stocks is riskiest among all alternatives with the amount of reward higher than others. 

Amount of Risk Willing to Take Time Frame for Your Financial Goals Type of Suitable Stocks
Want to take very less risk and you consider yourself quite conservative Long term goals say over 5 years or so Large and mid cap stocks
You are willing and capacity to take some risks as you are an aggressive investor  Long term goals of minimum  5 years of investment horizon Small and mid cap stocks
Do not want to take much risk as a conservative investor Have less than 5 years of intermediate term investment horizon Regular dividend paying stocks of mature companies
You are aggressive investor with high tolerance to risk Your financial goal expected to mature anytime in between 2 to 5 years Small and mid cap stocks of growth oriented companies with high face value and or regular dividend paying capacity
Aggressive or or conservative  Short term or very short term (less than 2 years) Don’t ever think for investing rather go for trading opportunities 

How you as an investor actually make money by stocks-investing?

Under ordinary circumstances, you as an investor can profit from your investment in the following three ways – 

  1. Make you eligible to collect cash dividends for your part of shareholding of any profits generated by the company,
  2. You can enjoy any increase in the intrinsic value per share, or 
  3. Can realise a profit, by selling your holdings. Holdings from the change in valuation applied to the firm’s earnings or other assets. 

Technically, these concept combinedly is known as an investment’s total return. I will discuss this at some time in the near future. Till then enjoy stocks-investing.  

About Author

Ankit Goyal
Ankit Goyal

A Finance Professional with over 12 years of experience in Capital Markets & Investment Advisory. Ankit has worked with some of the largest & award winning financial services groups at Regional and National Level. Currently with RMoney, Ankit is a Specialist of Investment Advisory for Equity, Mutual Funds , Insurance, PMS , Fixed Income Products , Structured Products etc, I have managed both Retail, HNIs & Corporates business segments . Ankit loves writing on financial planning, equities, mutual funds & other investment products.

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