Several investors have come to believe that investing in direct stocks is a smarter way to build wealth to meet various financial goals. But should you invest all your money in direct stocks? Or should it be a part of your overall portfolio. Part 1 of investing in direct stocks.
I am looking at the list of stocks shared with me by Ajay. It is a set of random companies – small, medium, big. I don’t see any common thread/theme in the list.
“I have been investing in these stocks for long now, gradually as I had money. The result is this portfolio.” Ajay shared the background.
“How did you select these stocks?” I am curious.
“Oh, I subscribe to this online stock advisory service. I look at their research reports, then do a little bit of my own study and then invest in some of the recommendations. I haven’t sold anything till date, only buying. I invest only for the long term.” Ajay was emphatic on the last sentence.
“And what is this ‘little bit of your own study‘ that you do?”
“I read about the company on the internet, its products/services, market share, look at competitors, if there is any particular concern about the company or bad press it has got, check its price growth, the 52 week high/low price and if there is no particular red flag, I invest.” He clarified.
“That’s quite impressive. I am glad to know that you don’t follow blindly.”
I pushed him further. “So, you are using the online research service to only buy. But you are not selling. What if they give a sell on a particular stock?”
“See I read the sell recommendation too, however, if I don’t see a particularly serious concern, I stay put. It is as is not easy to identify good stocks. Why leave what is good. I am sure good companies will go through ups and downs but will ultimately deliver.” Ajay sounded really good with his thought process.
But I was concerned. “What if the research company used different reasons to recommend a buy or they missed on some aspect which they have found not now such as company trying to get into unrelated businesses and hence updating its recommendation. Shouldn’t you be selling?”
“Umm!” He was thinking. “Not sure.” He was candid and honest with his response.
“Personally, I don’t think you are holding the best of the companies. Frankly, I don’t even know some of them.” I commented.
“By the way, how has the portfolio return been on your stock investments.”
“I haven’t really checked that. I guess I have got a decent return.” He was unsure.
“Well, you need to give an acid test to your stock portfolio. Find out how you have fared. It has been a few years in any case. That is first. Second, how has it compared along with your mutual fund investments?”
“I haven’t really compared that too.”
“Time to do that.”
Ajay was nodding. “I was thinking if I should just invest all my money in direct stocks and build my own stock portfolio?” He spoke.
“See Ajay, my suggestion is that you first make an assessment of where you stand with your direct stock portfolio. As long as you can put in the required effort towards understanding the businesses your stocks represent, it is good to continue investing in direct stocks. You should be able to make your investment calls and avoid big mistakes, it should be fine.
However, putting the entire money there is not what I would recommend. I suggest that you can count yourself as one of the fund managers in your portfolio, just like you have other fund managers represented by the mutual funds. Do a regular assessment and if over time, you feel you have been doing better, you may even allocate more towards your own portfolio.
However, if you are not for putting in the required effort as a direct stock investor, you may want to rethink. In fact, you should even rethink, if after all the effort, the fund managers are doing better than you. Why waste time and make your money under work.”
“I think it makes sense. Let me first assess my current portfolio. I am keen to build on it. Will you help me do that?”
“Sure Ajay, happy to!”
Are you investing in direct stocks too? Is your entire equity portfolio via direct stocks? How do you go about selecting and managing the stocks portfolio? What are the key aspects you consider? I would like to know your approach.
i have come across clients who are investing in direct stocks and most of them do not see their CAGR return. out of 15 /20 stocks which they are holding 3 or 4 stocks are giving humongous return and just by seeing the return of those few stocks they feel very happy and excited but unfortunately their exposure to those stocks in terms of percentage is very low due to which it does not create impact in the entire portfolio.
So, any one who is investing in stocks should compare the return of his/her stock portfolio vis-a-vis a normal diversified equity scheme and if they are not able to beat the equity scheme return by atleast 2/3% then they should not be in direct stocks. bcz then its not worth spending time , analysing companies etc.
True that, Dinesh!
I have invested in 8 tax saving mutual funds for diversity. is it fine? I have also invested some money in PPF and NPS apart from Life insurance, health insurance, etc. can you guide me further?
I invest in stock direct as well as through direct mutual fund route (SIP mode)
My style of investing is very simple
for MF, i do SIP twice a month on selected multicap funds.
for Stock, i invest same amount on same date on equal proportion to selected stock list.
By doing these i can compare, whether my direct stock is beating benchmark and MF return.
So far i have always beaten the MF retunrs.
Actual test starts now when market has started to correct
Great! How do you go about picking your stocks?
I use screener to shortlist the universe and later do self study to decide on investment avenue.
And how do you go about doing your own research? What parameters, filters, etc?