How to buy your first stock India I Stock market for beginners I Anushka Rathod

Summary

The video script emphasizes the importance of Warren Buffett's investment principles, focusing on not losing money and managing risk. It advises new investors to invest in familiar sectors, assess a company's business model, industry, product demand, and potential disruptions. It also stresses evaluating management quality, financial strength, and ensuring reasonable valuation before investing. The script serves as a guide for making informed investment decisions, with a disclaimer that the content is educational and not financial advice.

Takeaways

• 💼 **Investment Memory**: The first investment is memorable, but for those yet to invest, understanding the basics is crucial.
• 📚 **Buffett's Principle**: Warren Buffett emphasizes not losing money as the primary rule of investing, suggesting risk management is key.
• 🔍 **Risk Reduction**: To minimize capital loss, avoid new or unstable businesses and fraudulent management.
• 🏢 **Business Understanding**: Before investing, ensure a deep understanding of the company's business model, suppliers, customers, and expenses.
• 🌐 **Industry Analysis**: Consider the industry's health as it can impact even the best businesses within it.
• 📈 **Demand Assessment**: Evaluate both current and future demand for the company's products or services to gauge growth potential.
• 🛑 **Disruption Awareness**: Be wary of companies facing disruptions that could decrease product demand.
• 👔 **Management Evaluation**: Assess management quality by their historical performance, debt management, and alignment with shareholder interests.
• 💼 **Financial Strength**: Analyze a company's financials, including sales growth, profitability margins, and debt levels.
• 📊 **Valuation Importance**: Valuation is critical; understand if a stock is undervalued, fairly valued, or overvalued for informed investment decisions.

Q & A

What is the golden principle of investing according to Warren Buffett?

Warren Buffett's golden principle of investing is to not lose any money, emphasizing the importance of risk management as a primary rule.

Why is it important to manage risk when investing?

Managing risk is crucial because it helps protect the initial capital invested. By minimizing the potential for loss, investors can ensure that returns will follow as long as the risk is well managed.

What does the speaker suggest to reduce the risk of losing capital while investing?

The speaker suggests reducing risk by avoiding new or shaky businesses and fraudulent management, which helps protect the downside of investments.

How can investors identify companies with great potential for increasing their earnings?

Investors can identify such companies by checking the business model, management quality, financial strength, and valuation of the company.

What is the significance of focusing on one's circle of competence when investing?

Focusing on one's circle of competence allows investors to leverage their knowledge and expertise in a particular industry or sector, making it easier to analyze and understand the companies within that domain.

Why is understanding a company's business model important before investing?

Understanding a company's business model is important because it provides insight into how the company operates, its suppliers, customers, revenue streams, and expenses, which are crucial for making informed investment decisions.

How does the industry a company operates in affect its potential for growth?

The industry a company operates in can significantly impact its growth potential. If the industry is facing challenges or headwinds, even the best businesses within it may struggle to grow.

What factors should investors consider when evaluating the demand for a company's product or service?

Investors should consider both the current and future demand for a product or service, as well as the sustainability of that demand, as it directly translates into sales and potentially affects the company's profitability and stock price.

Why is it necessary to check for potential disruptions before investing in a company?

Checking for potential disruptions is necessary because disruptions can lead to a decrease in demand for a company's product, which can negatively impact sales, profits, and ultimately the stock price.

What aspects of a company's management should investors analyze before investing?

Investors should analyze the company's management by looking at its historical performance, debt levels, profit allocation strategies, alignment of management's actions with promises, compensation practices, and treatment of minority shareholders.

How does the speaker suggest simplifying the process of company valuation for investors?

The speaker suggests simplifying the valuation process by having a reasonable understanding of whether a company is undervalued, fairly valued, or overvalued, rather than relying on complex financial models.

Outlines

00:00

💼 Investing Principles and Risk Management

The paragraph emphasizes the importance of the first investment and introduces Warren Buffett's golden rule of investing: don't lose money. It advises new investors to manage risk effectively to ensure returns. The principle suggests that by avoiding risky businesses and fraudulent management, investors can protect their capital. The script also introduces four key areas to consider before investing: understanding the company's business, its management, financial strength, and valuation. It encourages simplicity and focusing on one's circle of competence, which refers to areas where one has expertise and can better analyze potential investments.

05:02

📈 Analyzing Business, Management, and Financials

This section delves into the details of evaluating a company's business model, industry dynamics, product demand, and potential disruptions. It stresses the need to understand the company's operations, suppliers, customers, and financials. The paragraph also discusses the importance of industry trends, current and future product demand, and the impact of disruptions on the business. Moving on to management quality, it highlights the need to assess historical performance, debt management, profit allocation, and alignment with shareholder interests. The analysis includes checking if management's actions match their promises and how they compensate themselves and treat minority shareholders.

10:02

💹 Valuation and Investment Decision

The final paragraph focuses on the valuation aspect of investing, cautioning against relying solely on complex financial models. It suggests using a simplified discounted cash flow (DCF) approach and understanding the factors that influence a company's P/E ratio. The speaker advises investors to consider whether a company is undervalued, fairly valued, or overvalued and to ensure there is a margin of safety in the valuation. The video concludes with a summary of the steps to follow before buying a stock, emphasizing the importance of understanding the business, management, financials, and valuation. It also includes a disclaimer that the companies mentioned are for educational purposes only and not investment advice.

Keywords

💡Investing

Investing refers to the act of allocating resources, such as money, with the expectation of generating an income or profit. In the video, investing is the central theme, with a focus on guiding viewers on how to make their first investment wisely. The script emphasizes the importance of understanding the risks and potential returns associated with different investment opportunities.

💡Risk Management

Risk management is the process of identifying, assessing, and prioritizing risks to minimize or mitigate them. In the context of the video, risk management is crucial for investors to protect their capital. The script suggests avoiding new or shaky businesses and fraudulent management as part of managing investment risks effectively.

💡Circle of Competence

The circle of competence is a concept introduced by Warren Buffett, which suggests that investors should focus on areas they understand well. The video script encourages viewers to invest in sectors they are familiar with, such as the IT sector if they work in IT, to make more informed decisions.

💡Business Model

A business model describes how a company creates, delivers, and captures value. The video emphasizes the importance of understanding a company's business model before investing, including its suppliers, customers, revenue streams, and expenses. This understanding helps investors assess the company's potential for growth and profitability.

💡Industry Analysis

Industry analysis involves studying the market conditions and competitive landscape of a specific sector. The script mentions that even a good business may struggle if the industry is facing challenges, using the real estate sector as an example. This analysis helps investors gauge the overall health and growth potential of the industry.

💡Financial Strength

Financial strength refers to a company's ability to meet its financial obligations and sustain its operations. The video script advises investors to check a company's financial health, including its sales growth, profitability margins, debt levels, and cash flow, to ensure it is a solid investment.

💡Valuation

Valuation is the process of determining the current worth of an asset or company. The video discusses various valuation methods, including the PE ratio and DCF (Discounted Cash Flow) analysis, to help investors assess whether a stock is undervalued, fairly valued, or overvalued. Proper valuation provides a margin of safety for investments.

💡Management Quality

Management quality refers to the effectiveness and integrity of a company's leadership. The script suggests evaluating management by looking at historical performance, debt management, profit allocation, and how they treat minority shareholders. Good management is crucial for a company's long-term success and shareholder value.

💡Earnings Growth

Earnings growth is the increase in a company's profits over time. The video script highlights the importance of analyzing a company's earnings growth potential as it directly impacts stock price. Investors should look for companies with a history of growing earnings and a sustainable business model to ensure future growth.

💡Margin of Safety

Margin of safety is a principle introduced by Benjamin Graham, which suggests investing at a price significantly lower than the company's estimated value to protect against the possibility of error or future changes. The video script advises investors to ensure that the current valuation of a company offers a margin of safety, aligning with the concept of not losing money.

Highlights

The importance of remembering the first investment made and its impact on an investor's memory.

Warren Buffett's golden rule of investing: 'Don't lose any money' and its emphasis on risk management.

The concept that managing risk well can lead to automatic returns in investing.

Advice to avoid new or shaky businesses and fraudulent management to reduce capital loss risk.

The strategy of focusing on companies within one's circle of competence for better analysis and understanding.

The four key aspects to focus on before buying a stock: business, management, financial strength, and valuation.

The necessity of understanding a company's business model, suppliers, customers, and how it makes money.

The significance of industry trends and how they can impact a company's growth regardless of its business quality.

Assessing the current and future demand for a company's product or service as a key factor in investment decision-making.

The impact of potential disruptions on a company's product demand and how it should be considered in investment analysis.

Evaluating a company's management by looking at its historical performance and growth.

The importance of a company's debt levels and how they can affect an investment's risk.

Analyzing how a company allocates its profits and whether it is reinvested, used for acquisitions, or returned to shareholders.

The significance of management's actions matching their promises and how it reflects on the company's credibility.

The red flags to watch for in management compensation and how excessive pay can be a warning sign for investors.

The importance of a company's treatment of minority shareholders and the transparency of information disclosure.

A brief overview of analyzing a company's financials, including sales growth, profitability margins, and debt status.

The role of valuation in investment decisions and the quote by John Maynard Keynes on the importance of being roughly right over precisely wrong.

The use of PE ratio as a proxy for DCF valuation and the factors that influence it.

The conclusion on the steps to follow before buying a stock, emphasizing the importance of a company's business model, management, financial strength, and reasonable valuation.

A disclaimer on the educational purpose of the video and the importance of reading all related documents before investing.

Transcripts

no investor will ever forget the first

investment they've made if you're an

investor you know what i mean but if you

have not bought your first talk till

date then this video is for you

let's start with a golden principle laid

down by mr warren buffett he said that

there are two rules to investing rule

number one don't lose any money rule

number two never forget rule number one

make this rule your guide as you start

to invest if i had to put this rule a

little differently it essentially is

trying to say that if you manage your

risk really well the returns will follow

automatically so whenever you make an

investment always always ask yourself

what is the risk here of me losing my

initial capital invested so how does one

reduce the risk of losing capital while

investing by staying away from

businesses that are new or shaky and

management that are fraudulent by doing

this you're essentially protecting your

downside while you invest but protecting

your downside is only half the work done

you also need to know how to invest in

stock that have great potential of

increasing their earnings in future and

how does one exactly do that by checking

these four things the number one is

checking the business of the company

second management third financial

strength and fourth the valuation we'll

discuss all these four points in detail

in a while but before that i would like

to give you this one small tip always

keep things simple and how do you do

that by focusing on your circle of

competence for example say if you're

working in the i.t sector then you know

how the it business works and it will be

easy for you to analyze i.t company and

id companies hence become your circle of

competence

[Music]

now let's get back to the four things

you should focus on before you buy a

stock the first is business now the

price movement of a company's talk says

very little about the business so you

should not exactly fixate or focus on

that but what you should focus on is the

following things you should always ask

yourself these questions number one is

do i understand the company's business

model it is very important for you to

understand who the company's suppliers

are who the company's customers are how

does the company make money what are the

expenses that are incurred by the

company what are the risk if you don't

understand all this and how the business

itself work it does not make sense for

you to invest in that stock because then

when the market goes down you won't have

the conviction to hold that stock and

remember investing in a stock which is

fundamentally strong will give you

results only if you hold it for the long

run then the second thing to check after

that is the industry now no matter how a

good business is but if the industry

itself is facing headwinds then even the

best business cannot grow a good example

for this would be real estate sector

from 2013 to 2020. after that the third

thing to check is what is the current

demand for the product or service the

company is making now for consumer

products for example bikes or biscuits

or hair oil it becomes very easy for us

to judge how popular that product is and

what is the demand of that product but

for companies which are operating in a

niche we might have to put in a little

more effort and do a deeper analysis

there now after the current demand we

also need to check what is the future

demand and how sustainable that demand

is so unless we see favorable demand for

that product or service in the long run

it does not make sense for us to buy

that stock why is that because a demand

for that product or service translates

into sales and there is very high chance

that if the sales increases the profits

also increase and only when sales and

profits increase the stock price will

also increase so after this the fifth

thing to check would be is the company

facing any disruptions because if there

is a disruption there is a sure-shot

guarantee that the demand for that

product will decrease so for example if

a company is making diesel combustible

engine then we should probably avoid

that stock because of the eevee boom

that is coming in india with this we

conclude the business aspect of it now

let's move on to the next thing you

should check and that is the management

of the company so what are the things

you should look at to guess if the

management is actually good or if it is

a fraudulent management or a management

which is not interested in providing

value to the shareholders so the first

thing that you can check here is

actually how well the business has

performed over the years and how has its

sales earnings and cash flows grown

because a good management will always

want that the retail shareholders like

you and me also profit out of that

growing company but if there is a

management which is not as good or if it

is even fraudulent they will hide those

numbers or they'll hide the growth from

those numbers because they don't want to

share the profits with retail investors

after that the next thing you should

check is has the management taken debt

to grow its business starting up always

ensure that you're staying away from

businesses which have very high debt on

their businesses and the next thing to

analyze is how is the company allocating

its profit is it investing in existing

business is it acquiring new businesses

to expand or is it giving the money back

to shareholders in the terms of dividend

the fourth thing to look at is is the

management walking the talk so

management of companies will promise a

lot of things that we're doing kpex we

will expand the new geographies we are

introducing cost cutting measures but

are those initiatives actually being

seen in the numbers are they actually

expanding in new geographies because you

don't want to invest in companies only

based on narrative of hope and you want

to invest in companies which are

actually translating that into action

after that what you should check is how

is the management compensating itself so

if a management of a company is doing

extremely well and they're being paid

reasonably for that then there is no

problem but if they're being paid over

the board and they're not sharing the

profits with the minority shareholders

then that is a red flag and you should

stay away from such companies the last

thing that you should check is then how

does the company treat its minority

holders the best way to treat minority

holders is to keep them at par with big

major and influential shareholders so

how does the company ensure that it can

ensure that by disclosing all the

important events to the exchanges and

making sure that the information reaches

to all its shareholders if a company is

not doing that and it is withholding

information and based on that

information if there is insider trading

then that company does not really

respect its minority shareholders and

you should probably stay away from it or

at least consider this as a red flag so

with that we conclude the management

analysis aspect the next thing you

should do is understand the company's

financials now understanding a company's

financials is a separate video in itself

but here let's take a brief look at what

all you should look at the first and the

most important thing is the sales of a

company now in the previous in the past

history has the company been able to

increase its sales over the years if

that is the case and that is a very good

sign and you should also estimate how

can it sustain or will it be able to

sustain this growth in future the second

thing to check is the profitability

margins now if the company is increasing

its sales it should not spend a lot of

money to do that if that is the case

then the profitability margin should

decrease now of course when you're

increasing your sales your advertising

and marketing expenditures will increase

but your economies of scales also hit so

there can be a little change in the

profit margins but there should not be a

drastic decline the next thing after

that to check is the debt status like we

talked about before stay away from

companies which have a lot of debt on

the books after that you should check

how the company has performed in terms

of return of equity and return of

capital employed after that you should

check the cash flow statement of the

company whatever profit the company is

earning in its p l should also translate

into cash profits the company is earning

and the last thing you should check is

is the balance sheet strong enough to

support future growth the company should

not have a lot of debt or it should have

space in its balance sheet to take on

external funding to support its future

growth so when you're starting up you

should ensure that you're only investing

in companies that have shown long

positive track record in terms of

business management and financial

strength but that is not it let me tell

you something hul gave zero returns

between august 1999 to august 2010 and

itc gives zero returns wealth since may

2012 to even today why is that that is

because of the fourth aspect and that is

valuation so before we get into the

evaluation segment i would like to tell

you this one quote by popular economist

john mayardkins he said that it is

better to be roughly right than to be

precisely wrong why i say this now

you'll get to know in a few minutes so

dcf or discounted cash flow is one of

the best ways to value a business or a

stock but to get to a dcf valuation you

need a lot of input numbers like free

cash flows growth rate discount rate and

terminal growth rate now it is very

naive to believe that you'll have a

perfect idea of what these numbers are

even seasoned investors don't know how

to do that and are not very precise so

it is better for us to instead of fixate

on making elaborate dcf excel models to

have an easy dcf construct in mind so

the pe ratio is actually a proxy to the

dcf construct but you should keep in

mind that the pe ratio is determined by

a lot of factors like the earning

visibility over long run the potential

of earning growth roe the debt of a

company markets view on the industry

dividend and buybacks and interest rate

if any company who is doing very well in

these seven factors it is bound to

happen that the company is trading at a

higher p e ratio just dismissing a

company because it's trading at a higher

pe is also not very wise you should take

a holistic approach here so when you're

valuing a company you don't need complex

financial models all you need to do is

have a reasonable idea that how the

company is valued is it undervalued

fairly valued overvalued and you should

ensure that the valuation that is there

currently gives you a margin of safety

and with this we come to the end of this

video just to summarize before buying

your first stock these are the steps

that you should follow first start with

companies where you have your circle of

competence after that check the

company's business model the management

quality and the financial threat of the

company and before buying any stock

always ensure that the value of the

company is reasonable to you i hope this

video was useful for you to make your

first decision or to buy your first

stock if you like this video make sure

you give it a thumbs up and also don't

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channel a disclaimer here all the

company's name mentioned in this video

is only for educational purposes and not

a buy recommendation if you have more

topics that you want us to cover tell us

in the comments

investment in securities market are

subject to market risks read all the

related documents carefully before

investing please read the risks close

your documents carefully before

investing in equity shares derivatives

mutual fund and or other instruments

traded on the stock exchanges