7 Steps of Value Investing: How To Pick Stocks For Your Portfolio

There are 7 steps of value investing by which you can successfully pick Indian stocks for your portfolio. They are:

Step # 1: Plan Your Overall Finances

Before you even think about investing in Indian stocks, first review your finances. Here are some ideas on how to plan your financial future.

Step # 2: Generate Lots Of Choices In Stocks

Generate lots of choices from which to select suitable stocks. Here are some ideas on how to generate great choices in Indian stocks.

8 Methods of Stock Picking: Value Investing Lessons from Benjamin Graham

Step # 3: Study The Qualitative Characteristics

Study the qualitative characteristics of a stock. Assess if its strong, average or weak.

Step # 4: Study The Quantitative Characteristics And Calculate Intrinsic Value

Here are some ideas on how to study the quantitative characteristics of a stock and how to calculate its intrinsic value.

Which Earnings and When Assets for Intrinsic Valuation

Step # 5: Calculate Margin Of Safety

Here are some ideas on how to calculate the margin of safety of a stock.

Margin Of Safety: How Is It Calculated?

Step # 6: Accept Or Reject. Repeat Steps 3 To 5

If you find that the qualitative characteristics of the stock are at least average and the quantitative margin of safety is at least average, it is a value stock and you can consider the stock for investment. Else reject the stock.

Repeat for all other stocks.

Step # 7: Build Your Stock Portfolio

Here are some ideas on how to build a stock portfolio.

What is the Value Investing Framework of Benjamin Graham and Warren Buffett?

14 thoughts on “7 Steps of Value Investing: How To Pick Stocks For Your Portfolio”

  1. Hi Satyajeet. First of all let me compliment you that you are doing a fabulous job of promoting value investing through this blog. I am avid reader. I have a query. This pertains to Margin of Safety in the diagram under Step #5:Calculate Margin of Safety. According to the diagram, Margin of Safety is equal to Price – Minimum Intrinsic Value. Now when this is +ve i.e. Price is higher than Minimum Intrinsic Value the stock is Undervalued or Bargain. I think i should be other way. I mean when one is getting Rs. 100 worth (intrinsic value) of thing for Rs. 60 then it is undervalued. Please do let me know if I am right about this.

  2. Great article! First of all let me thank you Satyajeet for making Stock Investing a bit easier for me. Being a novice investor, I was a li’l skepticle about taking risk, as I was not sure about which stock should I invest in. After reading your article, I have got a good idea about how to analyse a stock and pick the best out of the whole lot.

  3. Arun Ramakrishnan

    I find it very useful to study what Value based Fund Managers are holding in their portfolio. I have found many gems from Parag Parikh (PPFAS), Sankaran Naren(Prudential Discovery) etc. It also gives a newbie a good starting point for screening stocks. I think Mohnish Pabrai calls this copycat investing but initially i would just like to study why such stocks are good enough for such value investing gurus:) I still dont have the competence to understand RJ’s picks.Maybe i will learn those skills from experts in this forum. Now if people really like Peter Lynch style of value investing, Kenneth Andrade(IDFC Premier Equity) proves to be a good person to study. Please note that i do hold the above funds since i am too lazy to cover all bases of value investing myself and took the easier way out with SIPs.

    1. Excellent point Arun!

      Actually you are in very good company. Warren Buffett himself did a lot of Coattail Riding (i.e riding on the coat tails of skilled investors) while he was working at Graham-Newman, New York during the very early stages of his investing career. Of course, now most of us want to coattail Buffett.

      Warren Buffett uses the term Coattail Riding in his partnership letter of January 18, 1963.

      So, yes your point is very well taken.

  4. Hi Satyajeet, i was a fresher, until i read your post. But still, i want to do it practically, and i hope u upload more articles related to the investing in stocks. I have already started to invest in stocks via Religare Online, as suggested from some of my finance related colleagues. Also, was going through the other article, where in you have made us understand how to pick up stocks for investing, i personally follow each and every step mentioned. Again, a very thanks to you, for such valuable information, and would be waiting for more steps and lessons for investing.

  5. Sir, you have any paid blog ? Which is the best book for understanding Balance sheet in context to Indian Companies Act which is understood easily

    1. Hi Kishor,

      This is a free blog as of now. But thanks for asking! 🙂

      Unfortunately, haven’t found any book in India of sufficiently good quality. Unless, of course, we are talking about the chartered accountants and accounting professors. In that case, I recommend the NCERT books for basic accounting and T S Grewal for advanced topics.

      For investors, it makes sense to stick to the classics – Graham, Buffett and Penman – for balance sheet analysis. And try to implement it for Indians stocks. I will also attempt something along those lines in this blog.

  6. Please make me a value investor. I want to know how to calculate intrinsic value of stock and margin of safety.

    Nmali

  7. Sir u r really doing good bolgs and I am honestly say it is very helpful of those people who don’t have any idea is stock exchange.. Thanks

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