When individuals inform me about their inventory market disasters, the story is nearly at all times acquainted. It’s uncommon, “I bought a solid company at a sensible price, held it for years, and it went to zero.” What I normally hear is nearer to, “I bought stock based on this story… this penny stock… this F&O trade I didn’t really understand… and then it crashed.”In different phrases, most big losses don’t come from bad luck. They come from buying the wrong kind of stocks within the first place.That’s why, earlier than we discuss what to purchase, it’s extra necessary to be very clear about what to not purchase in any respect. At Value Research Stock Advisor (VRSA), that is truly the place we start. We have a transparent sense of universes we merely don’t contact. You can—and will—do the identical with your personal cash.Take penny stocks. The temptation is clear. “It’s only Rs 2. How much can I lose?” The sincere reply is: you can lose 100 per cent. A inventory buying and selling at Rs 2 just isn’t extra “affordable” than one buying and selling at Rs 2,000. The absolute worth means nothing by itself. A Rs 2 inventory could be horribly overvalued; a Rs 2,000 inventory could be genuinely low cost for the standard of the enterprise.Penny stocks come with a typical set of issues. They are sometimes thinly traded, which suggests you can fortunately purchase, however you might discover nobody to promote to when you need to get out. Information is scarce and unreliable. A handful of gamers can push costs round. If your most important cause for buying is “it’s so cheap, I can buy thousands of shares,” that’s not investing. That’s buying a lottery ticket. In VRSA, we merely keep away from this low-high quality, illiquid nook of the market. We need to research actual companies, not play with scraps simply because the sticker worth appears to be like small.This is the place an actual-life instance is beneficial. Think of a as soon as-hyped penny inventory like SecureKloud Technologies within the small cap IT area. At one level in 2016, it traded round Rs 900 after a wave of promotional tales and “multibagger” claims. A number of years later, as the truth of weak earnings and poor governance emerged, it fell to under Rs 50 by 2019 and at the moment trades at round Rs 25. Anyone who purchased in close to the highest is now sitting on a loss of roughly 95 per cent—regardless that the inventory at all times seemed “cheap” in rupee phrases. This is strictly the sample we attempt to assist buyers keep away from.Then there are the “story stocks” and everlasting “turnaround” tales. These are corporations that at all times have a story to promote. They’ll inform you they are coming into a sizzling new sector, or that they might be a pacesetter in some buzzword business in three years, or that they’re on the cusp of a large turnaround. The story retains altering; the earnings don’t.Indian buyers have seen this many occasions. Think of some of the actual property and infrastructure favourites through the 2007-08 increase that never recovered, even ten years later. Think of the supposed “next Infosys” names that went nowhere. Think of the “conglomerates” that stored asserting new ventures and funding them with increasingly debt. At the height, every of these had a lovely story. Today, many of these stocks commerce at a fraction of their previous costs, if they are even alive.Take the case of Suzlon Energy, which as soon as promised to be “the next big thing” in renewable vitality area has surged 4-5x a number of occasions on hope and headlines, after which slid again when the promised turnaround never confirmed up in earnings. The story was thrilling, however the enterprise never improved and to this date trades under its itemizing worth which dates again to 2005.When we take a look at a possible concept in VRSA, we never begin with the story. We start with the monitor file and the numbers. If the economics are poor, a intelligent story doesn’t change something. A great narrative sitting on prime of a bad enterprise doesn’t get previous our filters.And then there’s the brand new favorite: F&O punting dressed up as “investing”. Let me be blunt right here. Buying random choices or taking leveraged futures positions as a result of somebody stated “this is a sure shot” just isn’t investing in stocks. It is a leveraged wager on quick-time period worth motion.F&O is harmful as a result of small worth strikes can amplify into big positive factors or losses. Positions expire, which suggests time is at all times working towards you. You can lose fifty to 100 per cent of your place in a short time, even when the underlying enterprise is completely positive. If you like buying and selling F&O and know precisely what you’re doing, that’s your private selection. Just don’t confuse it with lengthy-time period fairness investing.In our world at Value Research, F&O doesn’t characteristic in any respect after we discuss stocks. We imply proudly owning slices of actual companies for years, not renting volatility for a couple of days.You may ask, if these items are so clearly harmful, why achieve this many individuals nonetheless get sucked in? The reply is easy. These traps promise velocity, pleasure and ease. They promise that one thing will double in six months. They give you one thing to speak about daily. They inform you to not overthink—simply act now.Real investing is the other. It’s usually gradual and typically boring. It doesn’t give you new bragging rights each night. It asks you to think twice about companies, dangers and your personal behaviour. At VRSA, we intentionally select boredom over drama. We are completely comfy if nothing spectacular occurs to a inventory for 3 to 5 years, so long as the enterprise quietly retains compounding beneath.You don’t want superior jargon to guard your self. A number of private guidelines will do the job. If the primary pitch is “it’s only Rs 10, buy a lot of shares,” stroll away. If you can’t clarify in a pair of sentences what the corporate does and the way it earns cash, stroll away. If the story across the enterprise retains altering yearly, stroll away. And if the concept relies on leverage, unique merchandise, or you being pressured to “act today”, once more, stroll away.The market will at all times have one thing thrilling to supply you. Your job is to not chase every thing that sparkles. Your job is to guard your capital and let it develop steadily. That begins with cleansing up your funding universe. If you merely cease buying the wrong kind of stocks, you’ve already taken an enormous step in direction of turning into a greater investor. The relaxation—what number of stocks to personal, learn how to dimension them and learn how to diversify—is definitely a lot simpler as soon as this primary step is in place.(Ashish Menon is a Chartered Accountant and a senior fairness analyst in Value Research’s Stock Advisor service.)
