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  • Rohit Musale, CFA

The 7 Step Process to Invest in the Stock Market

I have developed a seven step process for myself, when I am investing in the stock market.

I want to share this seven step process with you.

1) Use a filtering system

There are more than 5,000 companies in the stock market.

I want only 10 or 20 companies to be included as a part of my investment portfolio.

I need a filtering system.

It can be anything.

I might look at debt free companies.

I might look at companies which have a PE ratio of less than 20.

I might want to look at companies where the return on equity is minimum 20%.

I might look at companies which are doing stock buybacks.

I can look at multiple different screens or filters.

I want to see what kind of companies show up for these different screens.

I might combine these screens together to further filter some companies.

Example: I might want to put a filter which says: the company should have market capitalisation of between 500 to 1,000 crore.

That will give me a list of companies.

Out of these companies, I want to look at only those companies which are debt free.

The list will shrink.

Then again out of these, I want to look at only those companies where the company has done stock buybacks, or I might want to look at only those companies where the return on equity is minimum 20%.

As I keep adding more filters, the list keeps shrinking.

Let's say I am left with 10 companies.

That is my filtering system.

2) Pick the best out of the lot

I look at the financials of these 10 companies.

I look at some basic things like: how much cash does this company have? What is the market value of the company? What are the latest earnings of the company? What are the total assets of the company?

Out of these, I pick the best business.

I don't want to spend my time on all 10 businesses.

3) Study the numbers of the business

I have a framework where I put the numbers of this business for the past 10 years.

I look at the profit and loss account, balance sheet and cash flow statement of this company for the past 10 years.

I compare these numbers.

I look at the trends.

4) Quality of the business

Numbers tell me whether the business is doing well or not.

I also look at where is the management coming from.

I look at what the management has done in the past.

I look at the qualitative aspects of the business.

Who are the competitors? What competitive advantage this company has? etc...

5) Make a decision

It’s time to decide whether this company is worth investing in or not.

Just because the company is worth investing in, doesn't mean that I put my money immediately.

Who knows, the company might be overvalued.

I might invest some time in the future.

Maybe after one year or maybe after two years.

6) Make an allocation and invest at the right time

When the stock price of the company reaches to a level where I am comfortable investing, only then I pull the trigger.

I decide what should be the allocation.

Should it be 5% of my portfolio or should it be 10% of my portfolio?

I usually never go below 5%, because I want to make a meaningful bet.

7) Monitoring the company

I look at the quarterly reports.

If I find something that bothers me, I might exit the business.

Once I am done with this 7 step process, I go back to step number one.

Now, I am putting different sets of filters to find some more companies.

I don't rush through this process.

Learning about a company sometimes takes weeks, months, sometimes years.

I might spend a couple of months analyzing the company, because I am not in a hurry to investment. I have no FOMO.

And this is the key to investing.

'I am not in a hurry. I might never invest in a company even if I have spent an entire year analysing it.'

Investing is not a game of intelligence.

It is (as Charlie Munger says), a game of extreme patience combined with extreme decisiveness.


Rohit Musale, CFA

14 January 2023


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