Your long-term investing checklist

–Warren Buffett

I recently read a LinkedIn post by Nikhil Kamat, Co-Founder of Zerodha. It was about the recent 25% hike in Securities Transaction Tax (STT).

I’m quoting him here…

If an intraday retail trader buys and sells 10 lots of Nifty futures, he has to pay ₹855 in STT or 1.7 points on each Nifty lot. If he trades 10 times a day, he has to capture 17 points of a Nifty move every day on STT alone.

This is outside of Exchange charges, stamp duty, GST, Brokerage, and Sebi charges. The impact of each is as per the sequence above. Adding all this, he has to capture 30 points between Nifty volatility daily to break even (10 trades/day).

By chance, if someone is profitable after all this, they pay the maximum income tax rate. We then wonder why many traders find it hard to be profitable.

This is absolutely true.

It’s said that in the stock market more than 90% of traders lose money in their trading activities in the long term.

Among the remaining 10%, most don’t make much profits, certainly not enough to sustain a good lifestyle. Only about 1% of all traders make consistent profits which can justify taking up trading in the first place.

And it’s only a small fraction of this 1% who actually get rich from trading in the long term.

Yet almost every trader thinks he/she can beat these odds and get rich by trading in stocks.

This is a fallacy.

But there is no reason to be disappointed. The stock market offers a simple way to beat the odds and beat the market.

It requires you to become a long term investor.

In this regard, the Buffett quote above, is particularly illuminating. The market does indeed reward those who successfully apply the rules of long-term investing.

But first, it’s important to understand that no matter how great the effort, success in investing doesn’t come overnight. It’s one of those things in life that takes time, discipline, and patience.

If you think you have a formula for making fast money from the stock market, you need to drop it right away. At Equitymaster, we’re clear about one thing. The key to success in the stock market to practice long-term investing.

Okay, so how do you go about it?

Well, step one is knowing the difference between investing and speculation. You can’t become a successful long-term investor if you don’t know if you’re investing or not.

So here’s the definition of investing by the Dean of Wall Street, Benjamin Graham, himself.

An investment operation is one which upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are termed as speculative.

In simple words, putting your money in a stock which has a good financial track record and is trading at decent valuations, is an investment.

On the other hand, putting your money in a stock that’s loss making or paying too high a price for a good quality stock will most likely qualify as a speculation.

Now with that out of the way, here’s a checklist for all you long-term investors out there…

It’s always a good idea to start with debt levels of the company you are considering.

Ideally the company should have very little debt or should be debt free. Many fundamentally strong stocks have zero debt.

You can check out this list of debt free companies. Also it’s a good idea to look for companies that are actively reducing their debt. While they may have some debt today, they are unlikely to be badly affected by rising interest rates.

Here’s a list of the top companies reducing debt.

Next, you should check the dividend payout.

The fundamentally strongest companies have rock solid cash flows. They often share this cash with investors as dividends. The best companies usually have a long track record of dividend payments.

In a stock market downturn, dividend paying stocks are in high demand as investors prefer the safety of the cash flow that dividends provide over capital gains.

These stocks can also provide good dividend yields during a market crash. This is because they tend to fall initially along with the rest of the market. But as soon as their yields become attractive enough, investors jump in and buy them.

This means high dividend paying stocks have an in-built stop loss.

Check out the companies with the highest dividend payouts and the highest dividend yield stocks.

There are also excellent companies that raise their dividends every year. In these stocks you get the benefit of capital appreciation as well as rising dividends.

They are called dividend growth stocks. Check out the list of dividend growth stocks.

Companies that maintain good sales and profit growth during a stock market downturn as always in demand. Check for good growth in topline and bottomline. The higher the better.

The market knows these stocks are essentially getting cheaper. This is because high growth increases per share earnings at a fast pace. This combined with a falling market makes these stocks attractively valued. At a certain point, deep-pocketed invests start buying these stocks.

In fast growing stocks get to this point sooner than slow growing stocks. Unfortunately, these stocks tend to be overvalued at the start of the correction, so they more downside.

It’s a waiting game with high growth stocks. If you invest too soon you may end up buying the stock before its valuation has corrected sufficiently. But if you are patient, the stock market will present you with a golden opportunity to buy these stocks at a great price.

Check out the list of fastest growing companies as well as the top growth stocks in the market.

While no investor makes profits in the past, it’s still important to look at the past as a guide.

If a stock has been a multibagger in the past, it’s worth checking out if it was driven by fundamental reasons or by speculation.

If the reason was strong fundamentals, and those fundamentals are still intact, you could have a multibagger stock on your hands.

Check out this list of multibagger stocks.

The return on equity is one of the best measures of a quality company.

High return on equity along with low debt is a great combination to focus on when looking for stocks with the best fundamentals. All great long-term stocks have good ROE. Just be sure to use it along with metrics like high growth and low debt.

If you rigorously filter out low ROE stocks, you will get a list of stocks with high ROE.

Well, there you go.

We believe, with this checklist, you will be ahead of 90% of investors in the stock market. Consider it a guide to become a successful long-term investor.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com