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"Just invest in a set of good stocks, monitor them closely and hold for years." Good advice, right? And so simple, isn't it?
Actually, this advice is pretty useless and I say that even though I have given it myself a few times. In fact, it's not really advice but just rhetoric. In reality, it's like this old Wall Street joke: The newcomer asks a market veteran, "How do I make money on the stock market?" The old master replies, "Why, that's very simple. Just buy low, sell high." So the young man asks, "Yes, but how do I do that?" The reply comes, "That's very difficult. It takes a lifetime to learn."
Asking someone to just identify and buy 'good stocks' is similar to asking them to just buy low and sell high. The thing to understand is that everyone - every single investor - only buys good stocks. No one ever buys a bad stock. That is, in their own opinion. No one says that's a bad stock to invest in, so I'm going to buy some of it. When anyone invests in a stock, they do it with full confidence that it is a good investment. The criteria for 'good' will not be the same for different investors - a punter will have a very different idea than a fund manager - but they will all invest only if they believe that the stock is good.
So if you are investing for real wealth generation over a reasonably long period of time, how do you evaluate 'good'. I can revert to the joke and just say it takes a lifetime but actually, it doesn't. The basic concepts are quite easy to understand. Here's what I think they are. I must warn you that this is my understanding, someone else's might be different, might be better in some circumstances or whatever.
Central to identifying a good equity investment is growth. Why is that? Because it's a predictor of the future. Remember, the equity markets (all investment markets, actually) do not care about the past or the present. It's only the future that matters. However, it's not just any old growth - there are some additional qualifiers. Growth in profits, growth in revenue, high margins and a high return on capital. All these parameters should be advancing and not retreating, or at least be maintained.
So am I saying that is this all there is to it? No, not at all. However, these are the minimum qualifiers. There's a lot more to a good stock, but in my view, these are the bare minimum go/no go points. However, the reason that these points are important qualifiers is that they differentiate between a tactical approach to investing and a strategic one. Many investors keep looking for tricks. Some news, or some event or some secret or something else that might make a difference tomorrow or next week or next month. Sometimes the tactical moves work, most of the time they do not.
The important thing is that if you don't keep the basics of growth and financial hygiene in mind then there is no fallback. When the tactical tricks fail, they fail. However, if the growing profits mantra is followed then a tactical defeat can be easily converted to a strategic victory. You might be buying a stock for the wrong reason, but there is a heightened probability that it's actually a good investment. Conversely, if you don't qualify for these basics, then a tactical defeat can turn into a rout. The best and most high-profile recent examples are companies like Paytm and Zomato. They would never qualify because they don't have profits. End of story.
As I said, this is only a minimum qualification, a beginning of the process. There is a lot more to be evaluated about the business, the management and the stock's value. However, having a guard railing by the side of the road means that even if the movement is slow, an investor can't go off-track.
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