Investing as I see it
Hope is a strict NO NO in the stock market.
There is hope that Motilal Oswal will take up EMT and turn it around.
There is a hope that Idfc bank will become like Hdfc bank.
There is a hope that Jio Financial will be valued at 3-4 times Price to Book like it's peers.
There is a hope that Yes Bank and Vodafone Idea will turnaround.
It is 100% True that if hope is correctly executed, you will get an outsized return. But that rarely happens in the market. Mostly , it turns out to mistake of commision by the investor.
It is extremely hard to consistently make a monthly income from the stock market but it is extremely easy to 4x your money in a decade. I have back tested this with data . You need a 15% YOY share price increase which can be done by any prudent fund manager. I do not claim to hold this capability but I am 100% sure that PPFAS and Nippon AMC fund managers can achieve this for you !
I think of stock market as a place where my capital is productive and happy. I do NOT think of stock market where I can make money. I think it as a place where I can increase my money.
Like Vinod Sethi put it “I am looking for a gusher where I put one dollar today and it rains dollars all my life”.
Lastly, remember that Time is friend of Good business and enemy of bad business. Market rewards good decisions and punishes your bad/wrong decisions. It's that simple and straight forward.
Buy quality businesses with a margin of safety, which essentially means that buy permanent businesses for cheap. This is most overlooked but the most important principle of investing. Buying things cheap gives you room for error. Buying things cheap gives you benefit of both P/E rerating and Earnings growth in a business. It is really powerful if you understand this point.
Titan belongs to the Tatas. Titan is a growing business even as a large cap. But If you buy a thousand pieces of Titan at the ridiculous P/E it trades. And then Lab Grown diamonds kill Titan’s Natural Diamond business. Then you are f**ked. Because share price will fall for next couple of years.
Divis Labs is a great businesses with great moat. It has outstanding promoters and the Son is the CEO, Daughter is the CMO. Again it's a growing business with a long runway. What a wonderful business to own. But here's the catch it trades at 60-70x earnings ie P/E. Now if you buy a thousand pieces of Divis Lab, one outcome is you will end up a rich man after 10 years. But if anything happens like US FDA issue, the share will tank for few years . Why ? Because you are buying it at a very high price with a very less margin of safety.
What is Growth ?
Topline increasing 20 % for last One year, Three years and Five years .
Bottomline increasing 20% for last One year, Three years and Five years.
ROCE and ROE well above 25% tells you that it's a great business with some kind of competent management or a moat.
You don't want to invest in something like HUL which grows by low single digits. Better do an FD .
Be the son of the Tatas and the Bajajs and the Murugappas and the Muthoots. That is the magic of choosing the correct Promoter of the business you are going to own.
Promoter skin in the game -Promoter holding should be significant like they should own 50% and more of the company. They should feel the pain if share price / business does not do well. Unlike Sbi Cards where every 4-5 years , the MD CEO changes. Their family’s future should be invested in that company. Like the Muthoots who build the business for their future generations in mind.
Honest Promoter like Uday Kotak, Murali Divi, Vellayan Subahiya.
Competent Management and Dynamic capabilities of execution of their vision like Radico Khaitan's Abhishek Khaitan.
Rewarding Minority Shareholders should be the promoter’s moral responsibility. Like the Sundaram Group, Bajaj Group, Asian Paints, Hdfc Bank.
As an investor, our single most important responsibility is to allocate our capital to reasonably valued businesses with a long runway for growth run by honest and capable management teams which have hunger in their belly and posses a track record for THE RIGHT CAPITAL ALLOCATION.
Example - The capital allocation of the Murugappas and the Hdfc Group and the Bajaj Group is stellar. Rajiv Jain, Vice President of Bajaj Finance is called the “Champion of the Champions” and his salary is 80% ESOPs. Meaning his incentives as company management are aligned with the retail investors becoming rich. Which is a rare and beautiful thing to find.
How to know if a company does right capital allocation? - This can be answered very easily if you look at the ROE of the company. If it's north of 20% for last one, three and five years then your business’s CEO is doing a good job in allocation and productivity of capital.
I would better throw a viper down my shirt than take a personal loan at 12- 15% to invest in the stock market. It's a NO NO NO. My biggest NO.
Ignorance is NOT Bliss. Know what you own extremely well. Risk is when you don't know what you own.
There are some businesses which go up consistently 12% in the long term and you can own permanently like HDFC Bank/Titan, some which are high growth like Waree Renewable , some which are cyclical like Tata Steel, some which are government owned like IOCL, some which are highly regulated like Alcohol and Tobacco.
If you don't know what you own , then you would not know how to think about that business. Can I own Hdfc Bank for eternity and make money - Yes . Can I own Tata Steel for a decade and make money - No. Reason is because to make money in Hdfc Bank - you have to just hold it for next decade but to make money in Tata Steel , you need to know how to play the steel cycle. Each company is a different type of species. If you know which species your business belongs to , you can synthesize it to make money just like Humans synthesize fire to cook food.
