Over the last decade that I have been investing and trading in the stock markets, I have had the opportunity to try my hand at many approaches to make money. I have done long term investing (bottom-up stock picking), top-down stock picking, momentum trades, technical analysis, swing trading, day trading and derivatives (main options) trading. I have made and lost money in all of these endeavours. The only thing that I have gained in knowledge and an insight of what works for me in the stock market. And I have decided to stick to my knitting in the future.
Firstly, I have put some portion of my portfolio in exchange traded index funds to capture the index returns. I have invested in both the Nifty and the Junior Nifty ETFs.
For direct stocks, I am investing in companies with the following characterisitcs:
1. I look only at small or mid cap companies which can grow in the future.
2. Reasonably high RoCE or RoE with stable return ratios
3. Consistent record of sales and profits over years of performance
4. Easily understandable business model
5. Reasonable dividend
6. High portfolio concentration (although this might change in the future). Typically, I would not want to hold more than 10-15 companies.
7. Low PE (Less than 15...actually keep looking for PE less than 10)
The mode of investment would be to buy in monthly instalments on a regular(read monthly) basis coinciding with monthly salary. Do not look at market levels on a day-to-day basis. It makes no sense to observe markets daily. It numbs the sense of valuation. Instead, spend that time looking and catching up on good businesses. Think of which business would you want to do and why. Think of valuations on a market cap basis.
I think it is not a coincidence that people like Warren Buffet, Charlie Munger, Peter Lynch have made billions in the market consistently over the years. Independent research and thinking is the most important factor in making above average returns from the markets.