Stock investing is no rocket science

I had my first brush with investing when I made a list of some companies whose products I had used intensively in my daily life and while constructing my house almost 10 years ago. That list had turned out to be a 30 bagger over the least 10 years, i.e., the companies in the list had generated a return of 30 times. This made me wonder about their spectacular performance.

Companies with great products and happy customers often turn out to be winners in the long term. That made me realise that stock investing is no rocket science and that anyone can use their day-to-day experience to build wealth in the stock market. This is also how the legendary stock investor Peter Lynch picked stocks.

I follow the Peter Lynch style of investing, wherein I observe things around me and then arrive at most of my investment ideas. However, not all companies with great products turn out to be great businesses. Take Bharti Airtel for example. I use its services and am a satisfied customer. But the company is saddled with high debt and has not created any wealth for its investors in the last 10 years.

To check for basic hygiene and avoid troubled companies, I apply a numbers-driven approach, using screeners and models, to analyse and reject stocks. These quantitative criteria filter out companies with leverage and the ones with red flags and probable corporate-governance issues.

Moreover, I like to study companies which have failed and gone bust. This helps me stay away from wealth-destroying stocks.

How I pick stocks

1. I select only those companies which clear my screens. This removes subjectivity in analysing financial parameters. This also ensures that the companies shortlisted are not leveraged and the quality of earnings is good. The Value Research Stock Advisor website, lets you screen stocks and also create your own screens.
2. I prefer small- and mid-sized companies which are leaders in their businesses and operate in a market large enough to make them giants in the future. They should exhibit a decent growth but at a reasonable price.
3. I also look into larger and credible companies which are going through temporary problems and the market is bearish about them. I follow a value-oriented and contrarian approach for such companies.
4. I like companies which have fewest business drivers, are focused and easy to understand. A company whose fate is dependent on too many factors will probably not be a wealth creator. Strength in one of its areas will be done away with weakness in another.
5. I reject companies which have bad corporate-governance standards and where the management has a bad reputation and a history of maintaining questionable corporate-governance standards.