How to Win Big in the How to Avoid Loss & Earn Consistently in the Stock Market PART -1

Updated: Feb 20

Hello, flock. I hope your new year is off to a good start. I wish you the best of luck for the rest of your life. This blog will be unique in that I will release it in two parts because there is so much to learn from this book that I thought it would be much better to divide it into two parts. I hope you enjoy reading this blog.


As the title indicates, this book helped me in determining how to pick appealing stocks as a beginner stock investor. The author has written this book in such a way that it is easy to read, and he will also teach you why you should not gamble in the stock market. Let's begin with the author's description.

How to Win Big in the Prasenjit Paul Book How to Avoid Loss & Earn Consistently in the Stock Market.
How to avoid loss in stock market

Author description: Prasenjit Paul is a public speaker, investor, and SEBI-registered equity analyst. He began investing in the Indian stock market when he was 18 years old and has a track record of finding several multi-bagger stocks such as Chemcrux Enterprises, Lancer Container, Caplin Point Lab, Sirca Paint, Can Fin Homes, Ajanta Pharma, and others.


Chapter 1: How to avoid loss in the stock market?


The author wants to discuss why most investors lose money in the stock market.


  • The majority of people require immediate results. They believe that because I invested today, I will get a better return in 10 to 15 days, and people trade in intraday. Even my friends believe that the stock market is a gamble. I have told them numerous times that they must invest money in stocks for the long term, but they do not understand. As a result, avoid any intraday, futures and options, or margin trades. You will not be able to make any money this way. All of these techniques necessitate years of training and a significant amount of time to master, which we lack.


  • The most important lesson I took away from this book is that in order to create wealth, we must invest in high-quality stocks that are fundamentally strong and hold those stocks for an appropriate period of time.


"Very high return promise within a short period is dangerous"


Chapter 2: The stock market is not risky at all.


  • We must conduct research before buying any stocks; the author claims that we do so when buying a phone or a car, so why can't we do so when buying a stock? You are putting your hard-earned money into an investment


  • Don't be surprised if the stock price drops after you buy it. A mere 5% or 10% should not alarm you if you know you bought a fundamentally strong company. It may be due to a market correction. Stock is a type of ownership in which you have a portion of a company.


I want to add my thoughts to this chapter. If you are investing in any place, please conduct your research properly. Always try to beat the inflation rate. Otherwise, investing is pointless.



Chapter 3: First step of picking Quality stocks.


  • Checking the return on equity (ROE) & rate of capital employed (ROCE) is the first step in selecting a solid stock. It demonstrates how well a company (or, more especially, its management team) handles shareholder money. To put it another way, it measures a company's profitability in relation to its stockholders' equity. You can invest in this company if this ratio is above 20 and rising but always check the three-year data. For example, The return on equity (ROE) tells us how much profit the company makes for every rupee of equity it owns. A company with a RoE of 10%, for example, generates a profit of Rs 10 for every Rs 100 of equity it owns. RoE is a measure of a company's profitability.


Note: When you see debt in a company, always see what the ROCE is.

If the ROCE is more than 20 then it's good.

Formula Return on equity (ROE) = Net income/ Shareholder equity The net income you will get from Profit & loss

Shareholder equity from the balance sheet

  • The company's debt is the second most significant factor to look into. This tells us how much money the company has borrowed to run its operations. You can check your debt-to-equity ratio. Always avoid companies with a debt-to-equity ratio of more than one and growing.

Chapter 4: How to Evaluate management.


The most important lesson you will learn from this chapter is how to determine whether the company's management is efficient in running the company or not. Management plays a significant role in running a business. Bad management can run a good business into a loss. So, three things should be checked if you want to know about the management of the company.

A) Shareholding pattern. B) Dividend rate & Tax Rate C) Return of equity

  • When a company declares that it will buy back its own share, it is a very good sign because the prompters are confident in the company's future growth. Always look at the company's shareholding pattern; if prompters own more than 50% of the stock, the company is likely good.


  • It's also a good sign if a foreign institutional investor (FII) or a domestic institutional investor (DII) raises their ownership in a company. Especially if FII raises its stakes in that company is an incredibly good sign, you can acquire this data from the NSE or BSE because every quarter, a firm is required to publish its shareholding percentage.

  • You should avoid companies where any of the promoters have pledged more than 30% of the company's shares.


Shareholding pattern and effect on stock price

​Entity

Effect on stock price

Effect on stock price

Increasing in shares

Decreasing in shares

Promoters

Positive sign

Negative / Positive

Institutional Investors

(FII & MF)

​Positive

Negative

Retail Investors

Negative

Positive


Chapter 5: Valuation-It Matters

  • This is the most crucial chapter in the book since it teaches you how to value stocks properly. When buying and selling stocks, why is stock valuation so important? The term "valuation" refers to the study of numerous ratios such as the price-to-earnings ratio, the price-to-book ratio, and so on. Keep in mind, however, that a ratio cannot offer you a precise indicator.


A) Common Valuation Tools

Price to Earnings Ratio (PE ratio)


The price-to-earnings ratio (P/E ratio) is a valuation ratio that compares a company's current share price to its earnings per share (EPS). The price-to-earnings ratio is also known as the earnings multiple or the price multiple.


Formula: current market value/Earning per share

This ratio is simple and easy to calculate. You can easily get the calculated P.E ratio at any financial website.


Best usage of price to earnings ratio



  • Compare a stock's P.E. to its historical average: Compare a stock's P.E. to its historical average over the last three or five years. If you find a fundamentally sound stock trading at a significant discount to its historical average, it could be a good purchase.


  • Compare with its industry peers: Compare the P.E. of stock to the P.E. of other stocks in the same industry or business. A stock with a P.E. Below its industry rivals is more appealing in terms of valuation.

1) A higher P.E. is required by high-growth businesses. If a company consistently outperforms its peers throughout a market cycle, it is highly likely to do so again. The best example of this is Nestle India ltd it's PE is very high due to high growth.


2) It's all about the cash. Less leveraged are businesses that generate a lot of cash flow. Furthermore, these businesses have no trouble meeting their working capital needs. Such businesses, understandably, expect a higher amount.


Limitation of P.E ratio


  • The letter "E" stands for "earning" or simply reported a profit in the P.E ratio. The issue is that a company's declared profit can simply be manipulated.


  • Earnings or profit can readily be inflated by one-time income, lowering the PE ratio. A one-time expense, on the other hand, can hurt reported earnings, leading to a higher PE.


  • Cyclical firm: Cyclical firms are those whose profits rise sharply during a specific period and then fall after that period of time.


Price to sales ratio:


The price-to-sales ratio (P.S.) is computed by dividing a company's market capitalization (number of outstanding shares multiplied by share price) by total sales or revenue over the previous 12 months. The lower the price-to-sale ratio, the more appealing the investment.


Formula: PS Ratio = Current price of stock / Sales per share.



Benefits: Accounting fraudsters are more concerned with increasing net profit than with increasing sales. In comparison to earnings, sales are less volatile. Profits may be unpredictable for cyclical businesses, but sales are not.


Limitation: The biggest disadvantage of this ratio is that it does not guarantee profitability. Accompany may report more sales, but it is still losing money. When to use this ratio: The P/S ratio is more useful when analysing stocks of cyclical companies, such as those in the automotive and construction industries. This ratio is beneficial to any turnaround company.


Price to Book ratio (P.B ratio). The price-to-book ratio (P/B ratio) is a financial ratio that compares a company's current market value to its book value. When it comes time to liquidate, the price to book ratio tells you how much money each shareholder will receive.


Best usage: This ratio is extremely useful for banking or financial stocks. Banks have massive amounts of liquid assets on their balance sheets.


Drawbacks: Don't compare the P/B ratios of software companies because the sector lacks assets due to the service business.

A) Combining P.B ratio with ROE. B) Higher ROE will have a higher P.B ratio C) Companies whose ROE and P.B ratios do not match should be examined closely.

The most straightforward way to judge valuation



  • Compare the P.E with the last five years of data. If the data shows that P.E. is below, then it's historical, then it's buying opportunity, and if it goes beyond that, then book your profit.


  • Comparing P.E with an average growth rate at this point, the author tells us that the current P.E should not be more than two times the last three years' average growth rate. Right now, it's a little confusing, but don't worry, below you can see what the author wants to say.


PEG ratio = Price to earning ratio / Earning growth rate. For example

1) PEG < 2 (If your PEG ratio remains less than 2 then it's a buying opportunity)


2) PEG > 2 (If crosses 2, one can explore profit booking opportunity


3) PEG < 0.50 (Please be careful when this ratio remains lower than 0.50. You should analyze the total company. It may be a good buy or a value trap. So be careful if this happens.)


Note: Don't use this formula in the FMGC sector (Fast-Moving Consumer Goods) or a premium stock or monopoly and duopoly business. This valuation only helps in finding undervalued stocks


A nice word from the author wants to share with you. He tells us that valuation is an art, so don't think that you can master the subject from day one. To master any art requires discipline, practice, and a desire to learn.


My thoughts on this book: This is a true find if you want to start investing in the stock market. I highly recommend that you first read this book before starting. You will acquire a great deal of knowledge from this. You will learn a valuable lesson. This simple-to-understand book comprises only 200 pages, but each page is jam-packed with information. The most important thing I learned is that if you want to master any art, you need to practise that thought daily. Share with me your view once you read this book. The second part will come after 10 days till then enjoy your life & Stay safe.

Thanks, the flock's reading to the Sharath Bangera blogs, readinghabit.net! I hope you love this blog. I have been a reader for a long time, which led me to start a blog about online book bloggers in India. I chose to go through the best-selected books for enthusiastic readers and started my review line, known as, "online book review by Sharath Bangera."

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