When Arun felt stressed out and overwhelmed about all the stocks he had bought, he decided to take a break. He expressed his concerns to his father, who advised him to go meet his friend Mr. Murali.
“Are you busy trading Mr. Murali?” I asked.
“Hey, you are here. Take a seat Arun. Did you have your meals?”
“Yeah, I did.” Arun sat on a nearby chair.
“What is it? Your dad called me. Said you were worried. What’s wrong?” Murali was still attending to the terminal.
“The market is down and I am not making any money. The losses I am accumulating are over the roof. Nothing is getting better.” Arun shrugged.
“OK, tell me which all do you own?”
“Suzlon Energy, Unitech Ltd., JP Associates, Gujarat NRE Coke, Visagar Polytex, and so on.There are a few more. I don’t remember the rest of the names as such.” Arun stared down.
Murali shifted his gaze from the screen to Arun. “No wonder you are tensed. I mean, I would be, if I owned these losers. How did you even handpick this lot?” Back to the screen, Murali sighed. “Done for today. Sensex is up by 134 points.” Murali shut down the computer and rose from his seat. He patted on Arun’s shoulder, “Come I’ll tell you a few things.”
Both of them walked out of the house and into the lawn.
“There is this one thing that everybody must use before deciding to buy a stock. You know what it is? It’s common sense.” Murali looked into the distance.
Arun raised his head and looked at Murali. “What do you mean?”, he asked and continued staring at the grass.
“I am telling it seriously, man. And by common sense, I mean taking a common sense approach. Peter Lynch, manager of the Fidelity Magellan Fund in the US, follows this method. The fund brought in returns at an average rate of 29% annually. The man retired in 1990, with his record returns still standing.” Murali smiled.
“What is that approach about?” Arun was eager to turn his situation around.
“Simply put, it means that you should invest only in stocks that you know. The best companies have strong business roots in every corner is what Peter Lynch used to say. For instance, you are about to buy shares of a tyre company. You first walk into a tyre store and ask which brand has longer life, better quality and good sales. Study that particular company. Also avoid companies that people in general have bad opinions about. While at a medical store, do a market survey. Enquire for the medicines with the highest sales and ask for the companies manufacturing them. Companies with a larger market price will have a higher stock price.” Murali explained.
“I can find such information on Google, right?”
“Haha...No, not really.” Murali laughed. “Don’t be that guy, Arun. There are things that you need to go beyond secondary data. Companies that find a place in the ordinary markets will definitely shine in the stock market. Take the Eicher Motors stock for instance. The company started marketing Royal Enfield as more of a lifestyle brand and sales skyrocketed. The result- the stock prices shot up too! You just have to look around you to find opportunities. And always remember- finding opportunities isn’t effortless.” Murali smiled at the young man.
“All this time I based my buying decision on the prices. I don’t know a single one the stocks I own.” Arun sighed.
“It’s OK. You just have to be more careful from now on. Focus on studying the market and its ways. At some point, you’ll develop the intuition muscle. This would also mean being in constant touch with the society and businesses around you. Before jumping into annual and quarterly reports, filter companies by the method I just told you about. Test the soil, before you sow. Understand?”
“I like the way you put that.” Arun smiled.“Haha.. Come let’s have some tea. It’s about 4:30 now.” Murali put his hand over Arun’s shoulder and walked back into the house.