(3) Stock Picking Skills: How to select between 2 stocks? – Part III

This is part III of the article Stock Picking Skills: How to select between 2 stocks? – Part I. Please read the article from the first part before continuing with this one.

However, you should look at all the above points listed as First, second and so on. First assumption: Identify the value and source of investment, this itself is a tough task. How can one get accurate information about a company’s projects and the revenues its going to generate. Second, everything should go on schedule – may be possible, but not in majority of cases. Third, again another assumption, how can one get details of how much a project will generate. Fourth, calculating the PV from inaccurate FV – biggest problem is the rate of interest.
Most important – we have assumed only 1 single project. How about a stock like reliance, which has business in so many sectors – chemicals, refining, exploration, petroleum, textile, retails stores, etc. How can one estimate projects in so many different sectors, how about the time horizon of the different projects, how about the investments made in overseas countries, and the forex currency fluctuations?
The list is endless and all we end up with DCF is high level of error-prone method.


Ultimately, the Fundamental Analysis also works in only 2 cases:
1. When you are lucky and your predictions turn out to be correct
2. When you have insider information about the company (which is illegal)

Hence, we as common investors, either working as salaried professionals or running our own shops and businesses, cannot benefit from the hi-fi terms and calculations required in fundamental analysis.

Whether we follow the technical analysis or fundamental analysis, all that is required for us is luck. If we are lucky, our stock selection even in penny stocks will turn out to be profitable. If we are unlucky, our investment even in so called bluechip companies will end up in a loss, even in long run. Your mutual fund manager cannot do anything better – instead you end up paying commission to him.

These were the 2 basic analysis methods that are commonly used not only by individuals, but also by fund managers and asset management companies. In the next article, I’ll explain one of the most efficient valuation criteria, which will give some insight on stock selection. Please note that nothing is foolproof in this world of finance. The moment a method or strategy is identified as fool-proof, everyone starts following that and ultimately it fails. A simple example on similar lines: If it is known that Infosys will give 50% return in one year, everyone will be willing to buy Infy. There will be only buyers and no sellers. If a seller appears, he will be willing to sell Infy stock at a price which is already having 50% value added in it. Hence, your buy order will not get executed. If it does, it will be at a price that automatically has this value reflected into the price you pay for getting your investments.

Please visit this blog tomorrow for a better quantitative criteria for stock selection.

Do post your questions in the comments section, in case you have any.

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You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.

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