In my earlier post in June 2011, I had talked about Indian economy being the biggest growth story of the 21st century. This is based on how the most reliable global institutions and global banks are forecasting Indian economy to power ahead of US economy by 2042 and China economy by 2050(pl refer to my earlier blog on 25th June 2011). Indian economy is projected to grow 3 times by 2020 ,12 times by 2030(16 years) and 15 times by 2040(26 years) and so on. This would mean that nominal GDP (real GDP rate + inflation rate) will grow at a long term rate of 12-15% . In long run, Sensex growth is always co-related to nominal GDP growth . Potentially, you could grow your wealth by similar multiples/rate by investing in Sensex/ NIFTY Index based funds (Index ETFs). However, if we want to do better than these multiples/ rates, we have to do some homework in stock picking.
Firstly, don’t invest in stocks(pieces of paper) , invest in businesses underlying them .The key is to identify the high quality businesses who are the best proxies of this Indian economy growth story for decades. Remember that this is a long term story and hence we have to pick the best and robust businesses which have the best chances to grow & survive with Indian economy for next 10-20 years.
People have often asked me to discuss the methodology / framework I deploy to pick my winning stocks/ businesses.I am providing my framework which has been inspired by the principles followed by investment gurus like Warren Buffet , Benjamin Graham & Philip Fisher
Apart from the basic criteria of having strong co-relation with India growth story, the framework deploys 4 broad criteria/filters which are related to quality of business, management and financials.
The essence of this framework is that in long run a stock will give abnormal or high returns on your investment only if the underlying business generates high return on capital and cash flows consistently. You therefore need to select businesses with durable competitive advantage , highly competent management , strong balance sheet/ financials , available at attractive/ bargain prices to ensure that your stocks(representing those businesses) give abnormal returns and consistently beat the market year after year.
If you take a look at my portfolio of stocks for 2014 and 2013 which I had recommended in my Jan 2014 and Jan 2013 blogs, all these winning stocks have been selected using the above framework/ methodology. My 2014 portfolio has generated 38% returns (YTD, week ending 12th Sep 2014) w.r.t 27% Sensex returns (difference of 11%), while investing in safe blue chip/large cap stocks. The same portfolio has given >60% returns in last 12 months(1 year) w.r.t Sensex returns of 37%. My 2013 portfolio has given 50% returns till now w.r.t Sensex returns of 39% since Jan 2013.
You have to find 10-12 fantastic blue chip businesses having durable competitive advantage, available at attractive or fair valuation which can land you in gold mine in next 10 or more years,. Don’t over diversify by investing in more than 15 companies/ stocks if you want to beat the market returns. My top 5 stocks has >50% of my investment and Top 10 stocks has >80% of my investment. This concentrated portfolio (instead of over-diversified portfolio having 30-50 stocks) will force you to go for only those businesses where you have 100% conviction. Once, you pick them up, you need to stay with them for a long time (many years) so that you enjoy their long term growth potential fully , instead of churning your portfolio every month. I have not sold my businesses/ stocks for many years, till a drastic change has happened in the business model or financials of specific business which has changed the long term economics of the business or till the market has shown irrational exuberance for the specific business and has made the business very over-valued.
Remember, Successful equity investment is not a rocket science. It doesn’t require a high IQ or top professional expertise. All its requires is the right patience & temperament(long term & safe investing) , common sense driven framework or principles to select the right businesses available at right valuations & finally discipline/conviction to stick with your decisions, regardless of the short term variations of the market. You will need to ignore the market noise/ variations and show patience, discipline & conviction, if you want to win this game(which is a marathon & not sprint) consistently.
Happy stock picking and investing.