Investing in stock markets is now becoming a hobby and a way of earning side income for a lot of new millennial investors. Additionally, with all the information available across media and internet, picking the right stock for investment can get confusing. However, there are a few stock picking strategies you can use to invest in a systematic manner and to have control over your portfolio instead of just randomly selecting the stocks. Today, we will layout a few such strategies that will help you in the process.
Top – Down Stock Selection
A lot of renowned fund managers use the strategy of Top- Down stock selection. It simply means that you start from Macro and narrow down to Micro. Here’s a step by step guide for Top-Down approach:
- Analyse the Macro Economic scenario for India and Growth potential compared to other developing economies.
- Move on to the industries that are set to benefit from India’s economic condition and government policies.
- Identify the companies from such industries. The companies should be fundamentally sound and at a better price point to maximise the future gains
One of the biggest advantages of this approach is that with the real time analysis of the economy and sectors, you can be sure that the stocks you picked will definitely work in near future. However, there is also a good chance that from the eliminated industries, some stocks become outliers and outperform the market. With this approach you may miss out on such opportunities.
Bottom – Up Stock Selection
Individual investors may find Bottom – Up stock selection approach easier than the Top – Down approach because of ease of implementation. In this case, your focus is simply on finding fundamentally strong companies, hence you are sector agnostic. Here’s how you can go about it:
- Select the companies based on some fundamental criteria like Low debt, consistent increase in profit, management quality, competitive advantage over peers etc.
- Once you have list of companies then divide them in sectors and check potential growth for each sector
- Lastly, map the growth of the sector/industry to macro-economic factors and finalise the stocks with best growth potential.
This approach works really well to find fundamentally good stocks as the sole focus is on finding the stock first. Hence, even in adverse market condition, the stocks can do well if they have strong fundamentals. On the other hand, as the economic analysis is of lower priority, if the industry gets hit due to poor growth, the stock may not give good returns over short term.
Ideally, stock selection can be a mix of both of these strategies to arrive at a well-diversified portfolio. Whatever you do, do not fall prey to the most common Stock picking mistakes first time investors do. Some of them are Investing in a stock because your family member or friend or star investor has bought it or Investing because the stock has fallen or risen too much.
A famous investor and fund manager Peter Lynch has said a very apt thing about stock selection:
“If your only reason for picking a stock is that an expert likes it, then what you really need is paid professional help.”
Hence, focus more on the process of selection of stocks to ensure that you have valid reason for buying each stock in your portfolio. You can always reach out to Jiffy Support team for assistance in stock picking.