What does it mean for me to "Invest in Stocks"?
Let us get down to basics. Why should someone invest in stocks when money can safely and easily grow in almost 100% reliable medium term debt funds at near 10% Interest rate, if timed well? You can do away with all the study and the risk.
So, let us first get our objective straight, lest our efforts should misfire.
Let me do aside with a popular misconception. Investments are popularly believed to be a super-shrewd transactions at the end of which one makes "multi-baggers" and nothing short will do. This may work for some, but that is not my pursuit.
My Objective is humble and achievable by almost anybody. Mine is not a path of fire and there probably won't be much excitement. It will give mediocre returns.
My objective is this: If debt funds can give 10% annually, then I will not buy a stock which gives me any less. Then you may ask, why stocks? Just buy debt funds. Hold that thought.
In addition I also want the EPS of my purchased stock to have the potential to grow by atleast 10% every year. This is what makes stocks a more attractive proposition.
Let us see what are the implications of that by taking up a stock I am currently keeping a tabs on: Petronet LNG.
I see its EPS settling at around Rs.10. Since, I want 10% return on my money... I am looking to purchase this stock at Rs.100 and not a penny more. It is a reliable stock, backed by GOI. I also expect its EPS to steadily grow as it has another plant in the pipeline. I cannot pin an educated number to it, but 10% is a fine estimate.
So, after 10 years, at a compounded growth of EPS at 10%, I will see its EPS become Rs.40. Since I had purchased the stock at Rs.100.... a EPS of Rs.40 means a 40% growth every year then on! (This beats debt funds, hands down.)
However, it is a matter of ones education, his committment to learning the investment process to make sure he picks stocks that are able to transfer the success on the field to its Share Price. Many big names have failed.
Some managements lose their heads in success. They end up making acquisitions and are then unable to unlock potential, like Opto Circuit. OR economic conditions take a turn for the worse and they are unable to service debt and have to go in for debt-restructuring. This is an investment gone bad. So, you must get out. This is what makes the process interesting.