HOW TO SELECT AN EQUITY INVESTMENT COMPANY?

12 COMMANDMENTS

SARASIJ MAJUMDER

01.0—By investment, we mean only value investment—and not TRADING.

02.0—Compounding is a great process for multiplying money/wealth. Compounding can happen, if one remains invested for a long time. Hence—purpose is to find a Company, who will beat PAR, consistently, over a long time. The question is, how to do that?

03.0—First we select one of the three BUSINESS MODELs:--BàB; BàG;  & BàC. I don’t want to discuss the merits and demerits of above three models. Our preferred model is BàC. This is direct, more reliable, and predictable. Manufacturers of Consumer goods are one example of these type of companies.

04.0—Once selected the model, then we select market leaders in the GROUP, who are BàC companies, and consistently GROWING, MAKING PROFITS, and sharing WELATH.  And select the Market Leaders only. Our 1^st step is taken.

05.0—Now, we must study the business history, at least over one BULL cycle, and over one BEAR cycle. Study shall include the technical parameters including Common Size Analysis, Du-Point analysis, and Balance Sheets. If we find that the company is growing, and doing well in both the phases—we short list those companies or further scrutiny.

06.00—Now we check the company for its management process, function, and succession plan. Whether it is a PROMOTER run business, or professionals run this. We also see the list of EXTERNAL DIRECTORS. If the company proves to be TRANSPARENT, and professionally managed, well managed Trust Hold Capital, or most of the Capital are market hold, and exhibited good succession plan over the years—the companies is further shortlisted. CAUTION: -- If promoters hold large number of shares, and particularly large part of those are pledged –PROBLEM.

7.0 Company shall be largely free from DEBT, and regularly share BONUS, or Dividends. Pay all the taxes and have good Stock Liquidity.

08.0—Company, shall preferably be monopolistic, or have limited competition, or as a minimum, shall have sustainable competitive advantage for at least future 7 years. Government regulations on the product also must be evaluated in a futuristic manner. ITC’s Tobacco business is bound to get into loss, or low return, in spite of being some sort of MONOPOLISTIC MARKET LEADER in INDIA.

09.0—An important parameter is to evaluate PEG ratio, i.e. Trailing P/E for last 12 months/ estimated future 5 year’s Growth Rate (GR). A high PEG indicates an overvalued stock. PEG <1, with good EGR is ideal.

10.0—Another important ratio is PAY BACK RATIO, MODIFIED: -- MARKET CAP/ Next 5 years’ mean estimated PAT ( Profit after Tax).

11.0 Margin of Safety is difference between Value of Stock, and Price. The more the gap, the better the stock

12.0 RISK: -- There are three risks, mainly—a) Business Risk; b) Management Risk, and c) Risk from regulatory framework. If we identify that stock may suffer from any of the preceding risk factor, we shall avoid that stock.

 Note:-- Tomorrow, I will post an equity basket, prepared by me.

References: -

1.0 Most of the annual lectures of WARREN BUFFET.

2.0 Books of Benjamin Graham.

3.0 Books of Robert Kiyosaki.

4.0 Lectures and seminars attended on Financial Literacy

5.0 Selected publications from WEALTH, DALAL STREET, & OUTLOOK MONEY.