Raghunandan Money – Investment Khushiyon Ka.

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

Published : September 6, 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).
  • 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?

Wise investors understand that the end game for most owners of stocks is to end up with a collection of wonderful businesses that throw off large gushers of cash they can use to enjoy their life. In fact, I’d go so far as to argue that a truly great investment in stocks is not a company you buy at one price and quickly sell at another, hoping for an outsized profit in a short amount of time; but, rather, one that you can buy and then sit on for 25+ years as the underlying earnings per share continue to grow towards the sky even while the stock price itself is volatile.

That is precisely what happens when you hear stories of people like Anne Scheiber, a retired IRS agent who amasses tens of millions of dollars from her apartment by spending her free time studying and analyzing stocks, which she then acquired and sat on for decades. I’ve done numerous case studies of these secret millionaires; janitor Ronald Read with his $8 million fortune, Lewis David Zagor with his $18 million fortune, Jack MacDonald with his $188 million fortune. Over and over again, the same pattern emerges: It was rarely a case of luck. Instead, these people loved spending their free time finding businesses they wanted to acquire — businesses that many people would consider to be boring, but that had real sales with real profits.

And importantly, these were not investments that were going to make them rich overnight. They bought them and locked them away, letting time do the heavy lifting while making sure to never put too much of their personal net worth in a single enterprise. That way, if one or more failed, the compounding machine they built kept churning out increases in intrinsic value.

It’s a wonderful feeling. Through my family’s investment holdings, we are indirectly enjoying the fruits from the companies we own selling 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. Even though it’s unlikely you’ve ever met us, you can hardly live or work anywhere in the developed world without somehow putting cash into our pockets.

That is the power of investing in stocks.

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

Under ordinary circumstances, you as an investor of a company can profit from your investment mainly 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 realize a profit, by selling your 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.  

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