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How To Chose Stocks To Invest Using Economic Moat

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Learn how to chose stocks to invest using economy moat.

Here are some important things learn to chose stocks to invest.

1. Your country’s stock index has already chosen some great stocks for you.

For example in India our main stock exchanges are BSE Ltd. – Bombay Stock Exchange, and NSE – National Stock Exchange of India Ltd.

List of 30 stocks in BSE can be found here. This list may change from time to time.

List of 50 stocks in NSE can be found here. This list may change from time to time.

Now you have a handful of companies to research on, forget the rest.

Please note that in order to make it in the list of a country’s top stock exchanges, a company has to be well performing since years. No new comer is allowed in this list. A vigorous process is undertaken every year to chose the best performing companies in the list. Seats are always limited so only the best companies can get in.

2. Select 3 or 4 sectors which do businesses to retail traders.

Try not to select a sector that does business with only business houses, select sectors that does business with common people.

These businesses are known as BtoC – Business to Consumers. Do not select companies that do business in the BtoB Sector – Business to Business.

Here are some examples for you:

a) Banking Sector – In most families at least one member has a bank account in some bank or another.

b) FMCG Sector – Fast Moving Consumer Goods (FMCG). These are companies making products that are sold quickly and at a low cost to consumers either in a shop near their house or online through e-commerce websites. These things include things like food items, clothes, toiletries, over-the-counter drugs, processed foods and consumables. Almost everyone needs them to survive.

c) Pharmacy Sector – These do not come under over-the-counter drugs, but specialized medicines which can be bought only when someone shows a doctor’s prescription. These are usually costly medicines.

d) Automobiles Sector – We cannot sit at home and live our lives. We have to move somewhere to survive. As kids we went to school, when we grew up we went to college, then when we got a job we had to go to our office every day, people go on tours, visit places for business assignments, change city because they were transferred or got a new job.

80% of the times in our lives we keep moving. This is not possible by walking, we need vehicles to move. Lots of people have their own vehicles now and this sector is increasing everyday. For this reason Automobiles Sector makes it to the important sectors to invest list.

e) Information Technology Sector – Now a day’s no company can do business without computers and software automating jobs. This speeds up the data processing process and saves time. Interestingly Information Technology Sector was earlier only a BtoB (Business to Business) Sector, but in this fast changing world it has also become a BtoC (Business to Consumer) Sector. We use a lot of things in our homes where Information Technology Sector comes in, like Computers, Mobile Phones, Televisions, Stock Trading Software and many other electronic devices having some or the other Information Technology object which we ourselves do not know.

Housing sector is also important but history is a proof that it was and will be a risky sector.

Now chose one stock from each of these sectors with a great Economy Moat.

What is Economic Moat

Economic moat refers to the power and advantage a company has over other companies in the same sector. These things include:

  • How large and wide is its business
  • Trustworthiness of its brand name
  • Competitive pricing structure
  • Affordability of common man to buy its products
  • High demand of its products
  • Its ability to contain other businesses to surpass it and small businesses in the same sector to overpower it
  • Financials and company growth
  • Technology changes as per the new innovations in technology
  • Networking with other companies
  • Patent of their products to keep at bay rival companies to copy their production process which may have cost billions to research and make. Pharmaceutical companies are well known for doing this.

Other things also includes its financial profit history for the last 5 years at least

The companies with string Economy Moat can keep their services or products prices lower to attract more business. They can lower their prices because they make a lot of profit and are willing to attract more customers by lowering prices.

Once the research is complete you will get a list of three or four companies of different sectors to invest in. You can then start investing in them through the SIP method.

SIP method is Systematic Investment Plan Method

For example you have 10,000 to invest every month and you came out with four companies to invest.

10,000 / 4 = 2500.

Now start investing Rs. 2500 in each company every month. If any company stock goes down you will be able to average it out because with the same money you will be able to buy more stocks. The average value of buying the stock will go down too. If the price of a company goes up you buy less stocks with the same money.

Over time law of averages will come in and you will be able to make good profits in a few years.

When To Sell a Stock?

This question has not been answered anywhere but here are a few pointers.

  • Sell all stocks of a company if you see its Economy Moat going down.
  • If you need money for your financial goals like kids education or marriage sell the stock that has made the maximum profits
  • Sell all the leftover stocks in your account when you retire and keep the money in a few debt or liquid funds. Every month take money out as per your requirements and live a peaceful life.

Make sure that you nominate your spouse or children and write a will so that your children know about your investments and are able to take it out and repeat the process written above if something happens to you. If you do not write a will, your children may not be able to know or take out the money you earned in your lifetime and it will become a waste and will lie with the investment institution. Make sure before you go that this does not happen.

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