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:
- 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.
- Rising dividends, and increasing EPS over 15 quarters – not applicable to commodity companies like sugar, fertilizer, steel and turnaround cases.
- Strong barriers to entry: ITC, Indigo, …
- Strong RoCE, Ronw
- Solid growth or solid growth prospects: So sell Colgate to buy Nestle can happen 🙂 . Not recommending, just explaining. I have both.
- Limited capital requirements for growth – so prefer a Colgate over say Bharti Airtel or worse, a steel manufacturer.
- Start ups / turn arounds have a different check list, but will use a few of this with discretion.
- Reliable customers? HuL and ITC. ITC better, no Patanjali threat to cash business of Tobacco.
- Cost of Technological obsolesence? – prefer fmcg / pharma to Telecom
- Lots of free cash flow parked in nice simple assets like mutual funds, G sec etc.
- No diworsification by the group
- 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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