⛏️ Picking the right stock

How do I define a particular stock as a gold mine and how can Alpha and Beta values determine the life of a stock?

Let’s accept the fact that the life of a stock is ups and downs and there is no particular strategy that would work cent per cent. But when you zoom out and view from a different horizon that’s when you get a bigger picture and that’s when you are sitting on higher positive returns.

However, there is no strategy or trick in picking a bull stock 🐂 some of the research that you can invest in would be viewing the Alpha and Beta value of a stock.

The metric Alpha is defined as the movement of a stock relative to a benchmark index. An alpha of zero means that your stock or portfolio moves exactly the same as the benchmark index. If you are using the Nifty 50 or Nasdaq-100 as your index and it closes the day up 1%, then your stock or portfolio would also close up 1%.

• When Beta = 1 → The market rises, the price of the stock also increases, and when the market falls the price of the stock decreases.

• When Beta < 1 → The market rises, the price of the stock will rise a little less than the stock market. But the good thing is when the market falls, it will fall as little which means it will not fall.

• When Beta > 1 → The market rises, the price of the stock increases more than that of the market (high returns) but when the market drops, the price of the stock will fall more than that of the stock market.

In short, the Alpha value is the maximum that you can get and the Beta value is the risk involved in it.

💡 Pro Tip: Maximise Alpha value while minimizing the Beta value.

Some of the high alpha and low beta stocks are Infosys, Divi's Laboratories, TCS, HUL, ITC.

Even though higher risk should ideally yield higher returns, research has shown that low-risk stocks have consistently outperformed high-risk stocks and provided higher returns. This effect is termed the “Low-Risk Anomaly”.

While this isn't a stock recommendation but to all the retail stock investors who have just begun their journey, I would like to educate them that

'Don't ever try to catch a falling knife. It can hurt you badly!'

Therefore, choose any stock that has a beta value of 0 to 1 or 1.2 max. So, even if the market crashes or is in a correction, you won’t get much affected.

Other KPIs that one can take into account are CAGR (Compounded Annual Growth Rate), Market Mood Index (MMI), Earnings per share, Return on Investment, Dividends, P/E ratio, etc. All these metrics you can dig out from tickertape

So, the bottom line is successful investors do tend to make mistakes but they are well-informed and able to evaluate a company using all these metrics. And it's completely okay if you fumble at the start and make cash burns at the beginning. At least try to break even for a few months. Post then, look for these metrics in your fundamental analysis and decide for yourself whether a company is worth investing in.