Which Stock To Buy? Can You Recommend One Stock!
Can you recommend a stock for me?
Since I have been writing on investments, coffee conversations tend to be on the stock market.
Someone at the table asked me, ‘which stock would you recommend for me?’.
While I face this question many times, I continue to be flustered by it. Why would you ask someone to recommend a stock?
Even if the person is a renowned expert, you would be a stranger to him.
Which stock to invest in, is a very personal thing.
Your stock investment is a reflection of your risk appetite and expectations.
If you have a long term horizon, you would invest in a different stock vs if you have a shorter horizon.
If your stomach twists into knots with a 10% drop in the stock price, then your investment would be very different. If you are more sanguine and will recognise that a 20% drop in the stock price is normal, you will invest differently.
So, now that we have that out of the way, how do you react to this question.
In my mind, I am still a learner and have miles to go before I can start spouting any recommendations.
My conclusion is that there is a real need people feel for investment advice. They are not just asking for a stock recommendation but for investment advice.
Sometimes they are also just starting a conversation about investments.
Others, I am pretty sure, are only asking a leading question with the intent of sharing a hot tip they have.
Thinking of stock investments
But in this particular post let us consider those who are asking as a means of seeking advice.
For such an ask, the approach I would take is to ask them to clarify what they want. I will push them to clarify what they think of as sound investments. Do they have a clear investment philosophy or are they only conversing?
As usual, I have devised a few questions to help with this process.
Whenever you are next accosted by someone for stock picking or if you have the stock reco-itis, then these questions can help you.
1. What is your overall plan?
Have you actually articulated why you invest and what you want out of it
2. Do you have a comprehensive retirement plan?
One of the key reasons to invest is to create a retirement corpus. Have you considered what you want for a retirement corpus, are you investing in line with those considerations.
3. Have you sorted out your term insurance and health insurance needs?
Even before you start putting money into investments you need to sort out the very basics of insurance and taking care of your family.
4. Have you figured how much of your wealth you want to put into stocks?
Have you done some form of asset allocation? Do you know your net worth and how much of that do you want to hold in stocks?
5. Do you understand that with stocks you can actually lose your capital?
Have you internalised the fact that stocks go in both directions and they can actually lose you capital.
6. What investment horizon are you operating with?
Are you a short term investor, looking to make profits in a few months. This requires a very different mindset from a long-term, buy & hold kind of investor. You should be clear on which period you are investing over.
7. Are you willing to take the effort to actually learn about investment?
This is the most important one. Are you actually willing to put in the time, read, listen, view information and use it to build your own investment ideas? If you are not going to do this, then there is no point in asking for stock recommendations.
If I actually manage to ask these 7 questions to the next person who wants a stock recommendation, I guess the conversation will die quickly.
I bet these are not easy questions to answer.
But do bear in mind
I will go out on a limb and provide one piece of advice. While you are working through these answers, find an index you like ex. Nifty, Sensex, Nasdaq etc. and invest in that. Don’t wait to learn everything before investing. Start with the index and learn in parallel.
Use the index to scratch any stock market itch you may have.
Figure out your long term investing plans and asset allocation. Once you have those things sorted you can then have a deeper discussion about stocks with anyone. Once you have your investment planning sorted, you will have switched to the other side of the table. People will now ask you for stock recommendations.
Here is an investopedia article on stock market analysts.
Here is a very good article if you want to see how well experts have fared with their stock market advice.
Summary:
- Asking for a stock recommendation is a fruitless exercise as the expert has no idea about your particular needs
- Take the effort to understand your financial needs and situation
- Build a comprehensive investment plan
- Until you form a detailed plan, put your money into an index
- Learn about investments for yourself and then start having real discussions in this space
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
