I have some reasonably serious checklists (Charlie Munger, I had these lists before I knew that you had them!)..so let me share what are my check list items, and How I break the rules at times…

What do I look for in a company before I invest? well I look for good management – for me that means a group that has treated the SMALL shareholder well. So Essar, Kumar Birla, Modi, etc are OUT at step 1.

Lets look at the other factors:

  1. Located in West or South. Well location does not matter if it is an MNC. So a Nestle can be located in Delhi and an ITC in Kolkatta.
  2. Rising dividends, and increasing EPS over 15 quarters – not applicable to commodity companies like sugar, fertilizer, steel and turnaround cases.
  3. Strong barriers to entry: ITC, Indigo, …
  4. Strong RoCE, Ronw
  5. Solid growth or solid growth prospects: So sell Colgate to buy Nestle can happen 🙂 . Not recommending, just explaining. I have both.
  6. Limited capital requirements for growth – so prefer a Colgate over say Bharti Airtel or worse, a steel manufacturer.
  7. Start ups / turn arounds have a different check list, but will use a few of this with discretion.
  8. Reliable customers? HuL and ITC. ITC better, no Patanjali threat to cash business of Tobacco.
  9. Cost of Technological obsolesence? – prefer fmcg / pharma to Telecom
  10. Lots of free cash flow parked in nice simple assets like mutual funds, G sec etc.
  11. No diworsification by the group
  12. No sick / bifr companies in the group and all siblings doing well. Siblings means if i were to buy TCS I should be scared!! all its cash is likely to be sucked in to revive Corus – or such a scare exists.

Not too many companies pass through this …but yes there are. Now lets look at valuation:

  • reasonable value of the business – market cap: potential market potential (like it or lump it, today Indigo looks like a good share to won so that I can do delivery based trading)
  • if it is a value stock, is it a value trap or is somebody already working on increasing its market cap..for example if the manager of Value Discovery of  I Pru fund house has bought that company…
  • when will the price narrow? when is nice to know but not so important. I swtiched Ta Mo for Ta Mo DVR. I am expecting the gap to reduce, but that is not happening
  • how patiently will i wait (before buying and after buying) for the price gap to narrow?
  • is the current discount to the price (at which i want to sell) caused by some other reason that I have missed (you need to know whom to call)
  • is the volume / activity good enough for me to do a delivery based trading.

see if you can use this…happy to take feedback…remember I have shares outside of these also. I have Hdfc Ltd and Hdfc bank which may not meet some of the criteria. I have Cummins, Asian Paints, which are not really value. I have Colgate which is lacking growth, I have Siemens which has under performed over the last 2 years. I have Ta Mo Dvr, but I have sold off Ashok Leyland.

Reliance i lost patience about 6 years ago because I thought that the retail would be a huge drain. Proved right re retail, but I bought RIL in 2015 @800 and sold @990 – I hated the Jio delay. Jio is still to take off, but in case of gas and oil – they have money coming out of their ears and nose!

Having rules is helpful – the Roce, Ronw ensures that I do not get into slippery area like GMR, GVK – but currently looking at shares like Punj Lloyd, simply because they are at their nadir – and like Prashant Jain, I am convinced that we are at the cusp of an infra boom. And I do not like Larsen&Toubro.

Caveat: all the above-mentioned shares could be there in my portfolio. Or I could be having put/call options. Or I could have privately advised clients to do a strategic investment in some unlisted companies in the same line of business. Or these shares could be in the portfolio of the funds in which i have invested. Just a disclaimer to keep the regulator happy.

Frankly I do not care a damn how you use this article. What you do will not impact the value of my portfolio for sure 🙂

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  1. lakshminarasimman

    people who recommend, buy and hold itc shares should compulsorily spend 1 day at adyar cancer institute as a volunteer

  2. One can argue anyway one want. We have recently seen the JNU episode. Politics aside, I don’t think Indigo management is trustworthy. We have enough stories of Airlines going bankrupt and one must remember WB advise. If one wants to cash on the momentum, Indigo might fit the bill but certainly not for long term.

  3. Krish I can only write. How people read, whether they read at all, how they interpret, use, do not use is their call. I may / may not have a position, I may have put or call. I may be going short or may be advising clients to go long in a competitor. Please do what you want, to me it does not matter. I am an equity player and that you should know.

  4. Subra sir,
    this is a good primer for us. everytime I need new thoughts, I come to you and your blog. some of us are blessed to have you in our life. thank you

    Aditya

  5. Subra sir – your blog is one of the very few blogs which I follow and each post is an eye-opener. This is a good qualitative checklist starter. Everwhere I hear/read that one should analyse a company before investing. This post gives a good pointer on what to analyse.

    Regarding your point on how company treats minority retail shareholders – would this be assessed by way of dividend payouts ?

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