Most simple strategy to identify and analyze stocks

Have learnt this only in the recent years. Is key part of my investing endeavors since then.

I have been investing into equities since 2002 and over the years have had my share of successes and failures.

I may have identified multibaggers like Bajaj Finance, Asian Paints, HDFC Bank, Maruti, Nestle, Venkys etc. But then I have also invested in duds like Tata Motors, REC, Geodesic, Redington, D-Link etc.

When I looked back and analyzed those experiences, my most significant observation was –

I faltered mostly when I only relied on my opinion ignoring what the general market believed.

Being a fundamental investor, I was always looking for undervalued companies and trying to prove my supremacy and intelligence over the general consensus. In the process, I was doing financial analysis, reading research reports, listening to management and relying on grapevine information.

As such there was nothing majorly wrong with the approach and I did stumble upon some great investments. However, it did lead me into many poor over confident investments as well.

There is a difference between value buy and value trap.

The fact remains that pure value buying requires presumptions and assumptions about lot many variables – something on which no one has any control and hence despite the best efforts can go wrong. Also, pure value buying has a tendency of coloring one’s opinion – after the initial analysis, if there is a broad liking for a Company, one starts looking for positively biased information about that Company. 

“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.” - Peter Lynch Click to Tweet

I am in no way intending to undermine the importance of value buying here. Fundamental analysis continues to be a core part of my investing strategy. However, over years I have realized that there is no point in ignoring the collective intelligence of the market and trying to prove my supremacy.

I now try to gauge market’s perception about the Company first and then follow that up with fundamental analysis.

How do I do that?

Zoom out and look at long term price chart of the Company

Lots can be implied from the long term price chart of a Company –

  • How consistently it has performed vis-a-vis market’s expectations
  • How volatile is it vis-a-vis market and economic cycles
  • What has been it’s typical price movement patterns – some move in stages and some only one way
  • Whether it’s a growth story or a turnaround story

Answers to these questions help me in getting a feel whether market loves a company, hates it or is neutral about it. This in turn helps me in deciding whether to go into further details or not.

Some real life examples –

Look closely again at the above charts, give them a careful thought and I am sure you will find this to be a very powerful tool to identify a Company that suits your own risk aptitude.

E.g., when I evaluate Tata Motors now, I know the backdrop in which I have to evaluate the Company. More than just financial numbers, I have to look for cues indicating the turnaround or at least stabilization of operations. Likewise, I now know Subex is not for me currently – so better invest bandwidth analyzing some other Company.

There is no right or wrong investing strategy. What one likes is a function of his own skill sets, risk aptitude, return expectations and investment horizon. A long term chart provides a quick first stage screening tool.

To conclude – I have found long term charts to be a very simple and effective strategy to identify and analyze stocks. It helps me in understanding the underlying character of the Company and then decide whether that suits my own character !

Investing isn’t about beating others at their game. It’s about controlling yourself at your own game. - Benjamin Graham Click to Tweet

Disclaimer: Above are my personal opinions and not any recommendation. The reader should do his own research before taking any investment related decision. 

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About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.

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pritesh bagalAshok MalhotraNitin JainShailesh Recent comment authors
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Very very simple way to take the first step …I remember when u first tweeted about this sometime back…it is helping me a lot

Ashok Malhotra
Ashok Malhotra

A strong message conveyed in a very simple style…… reemphasizing the value of long term charts. A techno funda approach towards shortlisting potential winners helps. Also this does help cut the noise from short timeframe charts.

pritesh bagal
pritesh bagal

Nitin sir I am a beginner investor…I see investing as my career. I need to learn a lot, Do you have any suggestion for beginners to gain knowledge clearly.

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