Common Sense Investing Part 1: Introduction

In this Series we will learn who one can pick multi bagger stocks. Here we will be keeping aside all stock market theories analyzing businesses through our common sense.

Here we will be going thorough 4 parameters for successful stock picking or lets term it as the 4 rules for successful stock picking. Before going thought the 4 rules, these rules are proposed based on an assumption as well as a fact.

The assumption made here is that the stock that is being bought is held forever and the fact is one should keep in mind that the stock prices always retrace the growth in earnings of the business.

The Assumption 

Why should the stock be held for long?

Einstein called compound interest as the 8th wonder of the world.  Time and compound interest together are like magicians. The longer the assets in this case stock held the time and compound interest together help to increase the value of the stock.

Here is a chart that shows how compound interest and time can appreciate your capital when 100 rupees is invested for different period at different rate of interest.

Time(Yrs.) Rate(%)	10	25	35	50
5%	162.88	338.63	551.6	1146.73
15%	404.55	3291.89	13317.5	108365.7
25%	931.32	26469.7	246519.03	10947644.3
35%	2010.65	181277.77	3644868.78	328615788.00

The Fact

Stock prices usually retrace the growth in the company's earnings. For example, if the earnings of company 'X' increases by 20% this year then the stock price is expected to rise by 20% over a period of a year.

Here is an example of Divi's Lab

Based on these 2 statements here are the 4 rules for stock picking. In the upcoming tutorials we will be going through these 4 rules in much detail.

Earnings Per Share

2011	2012	2013	2014	2015
32.41	40.19	45.58	58.26	69.49

Total (%) 214.409

Based on these 2 parameters (a) Stock is held for ever, (b) Stock Price retraces the growth in earnings.

Here are the 4 rules:

Rule 1: Business must produce a product or a service for which the demand must grow with time.

Rule 2: Business must produce good quality non durable goods or service.

Rule 3: Business must be durable competitive and should possess an economic moat.

Rule 4: Business Must have Good Financials.

Video Explanation