The Indian growth story is intact and has shown that the market is not solely driven by the growth story as the recent market volatility has brought home one fact. There are other elements like inflow of possibly speculative funds that drive the market. These elements raises the questions in the minds of investors about the investment strategies they need to take, enter or exit the market or hold on to their investments or wait for investing freshly. The answers are difficult. However, this is the time for some reflection. The investor is likely to lose focus in such tumult of the times. He may be swept away by the allurement of fast money. He must remember that the stock market has never been an easy game. He should focus on his own research more than let anyone play god to him. If he cannot do this, he may trust, as a second option, a good mutual fund. As an investor while researching a stock what should he look for? Here are some supports.
First, he should look for the profit the company is capable of making. He can do this by making some adjustments to the book results of the company with some knowledge of the market the company operates in.
Second, keep in mind the concept of value addition. A company that has the capacity to add value to the society will survive long. He must know that profit is but one element of the value a company adds. The salary paid by a company to personnel is also a part of the total value addition made by the company. In order to know how both are parts of the value addition process when one is profit and the other one is expenditure. He must know the differentiation between value addition and distribution of that value. Value addition is the difference between the gross values of the products minus the values deployed by the company to generate that gross value. When a company pays its personnel, it merely transfers some value. Salary paid to personnel is not for destruction of any value, for it is not that once the services of a particular kind from personnel are received they become incapacitated to render that service again. There is no destruction in value. Therefore, salary paid is distribution of value like dividend paid out.
One can find out the total added by a company by adding to the profit the figures of salary, dividend paid out if already reduced before arriving at profit, dividend received from other companies and interest paid on capital. Third, once it is found out the total value added by a company, attention must be paid to the fact how the company deals with this total value. Does it retain it or distribute it? A company that takes into account its future needs of value will conserve appropriate value for the future. A company that overlooks or miscalculates its future needs or plays to the gallery may be digging its own grave. Fourth one should have knowledge of changing technologies and its impact on changing values of the products that a company produces. For ex;ample, videos were fast displaced by CD players which are also on their way to give in to DVD players.
The investor needs to take into account the acceptability of companyâ€™s products and various developments other identical companies are embarking up on so that long term sustainability of the companyâ€™s products can be ascertained. Longer sustainability results in substantial value addition and so is the investment return.