Long-term investment strategy / Fundamental analysis/ investment strategy

 What is Long-term Investment?

The investment time period approximately exceeds about 10 years that is considered as a Long-term investment. A stock that holds the longer period that returns will be higher, despite the stock market meeting many deep corrections, the worthy stock comes back to line. At the same time, short-term investment consist of many risk factors than Long-term, because, macroeconomic shocks, Geopolitical issue, and Recession might occur during the stock holding period, Generally, Long-term investors buy at the Bear market and sell at the Bull market until they would hold their positions for great reward. 

Advantages and Disadvantages of Long-term Investment.

The Short-term would give quick profits, It highly relies on stock market momentum, if the stock market loses momentum, investors will face loss. The stock market is more dynamic which is frequently affected by macroeconomic events, sometimes it takes long enough to recover from negative impacts however, the short-term investors have to protect their asset value from market decline, so, they quickly jump off to another momentum sectors or stocks,  Short-term investment will provide handsome profit during in strong Bull market but it susceptible in directionless and downtrend Market. 

Long-term duration is so long, so, it would not concern about short periods of market volatility, sudden changes of environment, and recessions. Long-term investments are highly dependent on individual stock competitive advantages, future cash flow, and future scope of business growth opportunities.  The compound effects will work perfectly in the Long-term investment, on the other hand, all the stocks will not make you rich, by putting money in a long-term. 

wrong stocks picking, Cyclical stocks, poor management, worst corporate governance, could disaster our long-term goal. 

How to select the stocks for Long-term?

The investors must examine a company - what services and products are offered to customers, and its competitive ability in the marketplace. Does this product or service benefit customers? 

Substitute products or Alternative products are competing with existing products, how does it make an impact on the marketplace? 

For Example, ITC is monopoly in cigarette business, BASF, is monopoly in Building chemicals, Pidilite is monopoly in Adhesive industry like those companies have no strong competition, and having pricing power, if those companies raise their product price the sale volume would not fall. 

Some established companies would adopt a new Technology, by implementing advance Technology in their Business operation, they enable to reduce business process expenditure, and can enter into mainstream market, many Banking and Financial company have embraced Enterprise resource planning, which integrate all Applications and brought seamless business operation, so, those companies could be reduced its operation cost and provide additional 

services and futures to customers, as a result, many traditional business enterprises failed to compete with Technologically advanced companies. 

Business Model

In the Technology world, every business is facing fierce competition. If they want to survive in their business, they have to come up with New ideas and new solutions for existing customer problems, unless competitors might defeat you, or hold back in your industry. 

High technology will not provide solutions alone for customers' problems, where Technology has additional components -  Business strategy, organization structure, corporate culture, and creating value to customers.  All of these aspects should be brought under a single process. Therefore, today's challenge is finding a viable business Model. The business strategy needs to make customer satisfaction, reduce the process cycle time, adopt an appropriate Technology, and lucrative revenue model. 

For Example, Bajaj Finance, which company is lending the personal loan, and Easy installment  to consumer durables with  low interest cost. The customers When it approaches for the loan that process will be done in a few minutes, the borrowers feel it is sound simpler than any other loan providers, Bajaj finance which use massive amounts of data to filter customer details and make business alliances with consumer durable manufacturers. 

HDFC Bank is another one Good example for New business model, even 25 years before which bank had been implemented electronic transaction, later, they could have possibility to provide all customer service through online. Therefore, businesses, High networth, and affluent individuals started to switch over to this bank.  

I have given an idea how to identify Long-term growth stocks. Search quality business, instead of stalwart business, many large establishments companies  have disappeared after 10 or 20 years. Investigate the company's competitive advantage, future scope of that business. Some investors would focus undervalued stocks, most likely this investment strategy will not work, because, some business might disappear by arriving of the new technology, if company is not ready to upgrade their business as changing over the business environment, 

For example, Zee and Sun Tv, after the arrival of Amazon, and Netflix, their revenue is constantly sliding down, further, higher possible to get away from these traditional ways of doing business. 

Evaluate the stock value

Nifty P/E ratio is a Good indicator, whether the stock market is undervalued or overvalued, whenever Nifty P/E went below 15, probably, many stocks were trading in under intrinsic value, i have given profound explanation in my Article Nifty PE ratio 

Generally, If Nifty PE goes below 20 that is considered as a bear market, deep  market correction helps to pick a quality stock at a cheaper price. In particular, Small and Midcap stocks hit rock bottom during the period of recession. Smart investors should utilize that opportunity to build a fortune, 

GDP/ Market capitalization

The stock market legend Warren Buffet would use this ratio to identify broader market valuation, Gross Domestic product / Total Market capitalization which ratio is move beyond above 100 that means the Broader market is overvalued, if it goes below 75 the broader market is in reasonable value, further, it could indicates even before recession comes, in 2000, and 2008, the US market GDP/ market ca[p ratio  was above 150 . According to a study, Investors who got higher returns when the stock market was lowered,  in 2019-20 Indian stock market has reached 56 percent but now this ratio is 100.   

Industry Negative sentiment

In January 2018, Nifty metal index high was 4250, then it was sliding down around 1500, due to the US- China trading war.. In this situation, Investors are able to get exceptional opportunities to multiply the stock's value. Thus, many steel industries shutdowned their operation, because, steel industry can not compete with low priced Chinese products, and environmental issues in Europe, Indian companies too, became the default. So few companies were remaining in to the market, after Covid lock down, demand has come back to previous line, but suppliers were very few, consequently supply crisis cheered up the metal industry. Their sales and operating margin increased and they have given multifold returns to investors in a short run.

  

I have always not preferred the metal industry for Long-term investment.  Because it is a cyclical stock, there will be uncertainty in the market, so stock prices will fluctuate as market demand  changes. 

Likewise, Auto industry stock was running up three consecutive years from 2015 to 2018, then it started to decline from its peak. This downtrend was lasting upto 2020, almost all stocks were trading below its intrinsic value. Now, the Auto sector stocks have also given a huge return.

I was always given an example, not a stock recommendation. For a decade, the pharma industry has been suffering from Govts price control and expiring of patents. Still now there does not seem any evidence to participate in the rally, when it sees long-term  perspective, pharma could give higher returns than other sectors. So, as an investor, we should look at future value rather than be afraid to market Speculation.

Quantitative analysis

A company consistently earns a high percentage of gross profit margin, and keeps control of its SGA cost so that company is able to survive in their long haul. In addition, check out financial and profit leverages, if a company can increase its sales without heavy capital investment, which means, that company is using a new business model and having more competitive advantage than rivals. 

As a growth of shareholders Equity year on year, that company is constantly putting aside their money into long-term growth, negative growth of shareholders the stock price will fall. 

Debt/Equity Ratio is one of the main indicators to identify a company”s financial leverage, A company is borrowing long-term and short-term that total debt is divided into Shareholders Equity, the Total debt is exceeded than Equity that investment will be risky. If a company is maintaining low debt that reduces interest expense, and avoids default risk. 

Return on Equity would calculate investors- how much shareholders earn through net profit, does not matter how much company is earning , but how much investors' Equity is earning,  which ratio is above 17 would be considered as a good return, if it returns below 17 that is not a good sign. This ratio should be compared with peer group industries, 

Return on Assets A company how much earn through its total assets, (Total assets/ Net profit ) the lower numbers indicate company is not efficiently using its resources, the higher ratio indicates the company wisely used its potential resources for  productivity.  

Price earning growth ratio would measure a growth stock's valuation, To weigh an intrinsic value of growth stocks with earning multiplication. PE ratio/ EPS growth rate = PEG ratio. When stock is traded with a High PE ratio thus, we may compare with this ratio. The ratio is above 1 that is considered as a high value stock, if it is being below 1 that is considered as a value stock. 

Here it has given a few important ratios and Financial statement analysis, but investors should dig deeper and require additional information through Three financial statements. So, check carefully before you select a stock.