How to buy your first stock India I Stock market for beginners I Anushka Rathod
Summary
TLDRThe 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
💼 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.
📈 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.
💹 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.
Mindmap
Keywords
💡Investing
💡Risk Management
💡Circle of Competence
💡Business Model
💡Industry Analysis
💡Financial Strength
💡Valuation
💡Management Quality
💡Earnings Growth
💡Margin of Safety
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
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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
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