Stock picking is not easy. It is about analysis. It is about avoiding the landmines. It is about position sizing. It is about risk management. It is about having no ego to pull out when your thesis doesn't play out.
Here is a data point that Devina Mehra, founder and CMD of First Global, shares. Followed by some advice for stock investors.
Over the past 20 years, if you look at all the listed companies in India, how many of them have shown some profit growth (however miniscule) every single year?
Just ONE. HDFC Bank has shown profit growth every year, over 20 years.
Let us reduce the time frame.
Over the past 10 years, if you look at the 4,200-odd listed companies in India, how many of them have shown profit growth every single year? Just 16! Just 0.4%! Let that sink in.
A bar as low as net profit growth >0% every year.
Here are the companies in alphabetical order.
- Asian Paints
- Associated Alcohols & Breweries
- BDH Industries
- Bharat Rasayan
- Can Fin Homes
- Dynacons Systems & Solutions
- HDFC Bank
- Kotak Mahindra Bank
- Lincoln Pharmaceuticals
- Lux Industries
- Mallcom (India)
- Medicamen Biotech
- Morepen Laboratories
- Power Grid Corporation of India
- RACL Geartech
- Vipul Organics
For TCS, the missing growth year was FY21. HDFC Bank features in both time frames. Supreme Industries would have featured had their profit not declined in FY23.
(All data for the remaining companies is as on March 31, 2023).
Making excel spreadsheets and projecting growth is easy. But there is a yawning gap between making estimates on excel, where the growth rate can just be copied or improved with the click of the keyboard, versus the real world where growth is not easy to come.
Make no mistake: Risk Management is key, whether in trading or investing. Look at the downside. Look at the risk. Evaluate what can go wrong. You can't price everything to perfection.
Even Warren Buffett and Prashant Jain say picking stocks is hard
Remember these 5 principles when valuing a stock
