When to buy and when to sell a stock: Strategy Explained.
"Risk comes from not knowing what you are doing"
We should invest at least 15 minutes of our own time to read and analyze a stock, before investing.
A common question that bothers everyone is when to buy a stock and when to sell them.
The enemy of investment is activity!
Now because this question is so obvious, most people wants answer right now. Hence they seek advice from anyone they come across who he thinks knows more than himself, often it is a myth. Also they would just go to an app such as Groww or Zerodha or wherever they have their demat account and see which stocks have the most gainers in last few days or in a week. The hope is that the gain will continue forever. Those advisors or most often close friends would not spend even 5 minutes on researching the fundamentals of the business as they go through the same stages. That’s called speculation or “hope”. In stock market “hope doesn’t work”.
Most of us have actually wasted valuable time in looking for which stocks to buy, and looking for recommendation on social media or news channels etc and by asking when to buy or sell. Instead that time could have been invested in studying fundamentals of a company, and determining when to buy or sell. Time is money in stock market.
So, now the question is what strategy should one deploy which doesn’t take any hard-work or consume much of one’s own time. But that’s where the blindspot is. As there is no easy strategy, that’s where many inferior quality financial advisor and Mutual fund managers makes their money by continuously giving expert recommendations to buy and sell. The more frequently you buy and sell, the fund managers makes more money. Hence, “Say no to activity”.
Let’s look how at TSOS investment research we use a simple strategy to make sure we don’t cross the safety margin and also book decent profit.
All the tools that is needed for such stock analysis is actually common and easily available. Let’s look at that list now.
Financial ratios: One of the best resources of understanding financial ratios for esp. Indian stock market is this book: Financial Ratios by Sandeep Goel.1
Unfortunately, we don’t have much helpful study material to understand the Indian stock market, and let aside any good books. The above book is a gem. Most books on Indian stock market describes someone’s personal journey from rags to riches and few anecdotes which doesn’t offer any strategy when to buy or sell a stock.
Here are some important financial ratios that we should always track.
Historical earning growth
Sales growth
Cash flow growth
Book value growth
Debt to Equity ratio (Industry specific)
Price to book ratio
Price to sales
Price to cash flow
Dividend yield
This list of ratios comes very handy to analyze the fundamentals of a stock.
Alright so using the above tools and knowing how to calculate the DCF, we can actually have a very simple strategy to calculate when to buy and when to sell.
Ok then, let’s see the simple strategy.