As a stock market investor, you want to know about businesses that consistently make money. The common tendency is to seek advice from someone who is an active investor in the stock market. Some people adopt a ‘Do-it-Yourself’, or DIY, approach to investment. There is a problem with all of the above. If you do not do all of these right, you may not be able to achieve your objectives.
It is great that you want to know about companies that make money. Identifying such businesses is easier said than done. For most people, this is a job for someone else to do. They shut their minds the moment anyone says ‘financial results’. As businesses announce quarterly financial performance, newspapers are full of advertisements that show how a company did under various heads. The comparison is usually with the preceding quarter and the quarter at the same time in the year-ago period. Now, unless you really follow the sector or the trend, these numbers will make no sense.
So, to identify a hot company, you need to really know more about the company’s potential revenue and profits. Share prices move today based on an expectation of revenue and profit in the future. Reading through these numbers could be overwhelming if you do not know the things to look for. For example, when technology companies announce results, the immediate market impact is due to the management’s projection for revenue and profit in the upcoming quarter or the financial year.
Smart fund managers who manage mutual fund money or analysts who track various sectors keep a close eye on the future. A company becomes a ‘hot’ stock to go after if the future business and profit environment improves. For example, a sharp growth in US corporate profits is good news for Indian IT services companies as about two-thirds of their revenue comes from US corporations. Any commentary by the management of TCS or Infosys on prospects for higher IT spending in the US is positive. Similarly, any negative commentary is negative.
Seeking advice from others
The other habit is to rely on someone else’s view of the company and financial performance. You can do that provided the person tracks businesses regularly. So, the people who are analysts track a particular sector closely. You may also speak with chartered accountants or other people who can read financial results and data well.
However, a lot of investment decisions have to be taken keeping personal priorities in mind. The way someone looks at a company’s financial results could be different from the way you are or your needs are. Investing in equities is a lot about your future income, your ability to take risks and your ability to stay in the market when share prices fall. So, that someone who helps in advice may say the stock looks good because future prospects are positive. When speaking to an expert, try to get the big picture on a sector or a business.
Do it yourself
While experts can only say what they see, this is something most people indulge themselves in. They try to read the financial results published by businesses. They listen to experts on television and watch managements respond to tough questions on the quarterly performance. The trouble with the Do-IT-Yourself or DIY model is that a lot of things said are in a language that a non-finance person or a non-expert may not understand.
For example, when technology companies are asked about the ‘pricing pressure on billing rates’, it really means asking about better selling price for their software services from clients for the future work. Similarly, banks are often asked about prospects for net interest margins (NIM). This is the net profit they make on their interest income after deducting the cost of funds. So basically, NIM is the profit indicator for banks. The summary of all this is that you need to listen, learn and do things the right way to make winning decisions.
(Author is publisher and founder at Simplus Information Services Pvt. Ltd.)