When it comes to investing in stocks, everyone would love to follow Charlie Munger's advice, “If you can buy a few great companies, then you can sit on your ass.” However, it is not easy to identify stocks that you can invest with a 10-15 or even 20 year time frame. Investors are intrigued by several worries when it comes to investing: what if the markets crash? What if the promoter runs away? Will the company be around 15 years later and so on. All of these are valid questions. Stock market investing does expose you to market gyrations-years of bust and years of boom.
For every success story when investing in stocks, there are several cases of investor frauds. There are also instances when some companies could just not cope to the changing times; the most recent being that of Hindustan Motors, the makers of the Ambassador car, which ruled Indian roads for several decades, including the power centres of the government until recently. Another company, Moser Baer, the makers of optical media like CD and DVD has become irrelevant in times of USB drives. The list is long, but you get the drift.
Then, there are concerns over the integrity of the promoters. Indian companies are largely promoter-driven, and many are notorious for their nefarious ways of running the business. Today, Vijay Mallya, the promoter of Kingfisher Airlines or Subrata Roy Sahara of the Sahara group are promoters, with not a very clean track record. Many would remember the IT czar Ramalinga Raju of Satyam Computers, who famously cooked books that came out in the open.
The motive is not to scare you with such examples; instead it is a warning to check the profile of the promoters and also the company board to trust them with your money. Some of the best minds in the industry didn't have a hint that Ramalinga Raju was cooking books for years. More recently, banks did not realise the kind of defaults that Kingfisher would land into, leaving them with converting their debt to equity, with disastrous effect. So, screen the company and the promoter and ignore those with issues, however, faint they may be. The MD of a company caught stealing a mobile phone from an airport is not a person you should trust your money with.
How to spot a winning stock?
First, identify companies that will live for years. A good place to start is to look for market leaders-companies that are the strongest in their fields. Hindustan Unilever sold soaps to your parents and is most likely to sell them to your kids when they grow up. Market leaders need not be the largest companies, even smaller companies create a niche; Fevicol is a good example and so is AIA, a company that operates in a very niche area. Look for companies that have been selling the same thing for decades and have become one of the best in doing that.
Importantly, do not restrict your search for companies purely based on numbers. Although numbers reveal a lot, they sometimes do not tell you the full picture. For instance, the financials does not give you the idea that Maruti sells half of all passenger cars sold in India. Likewise, numbers will not tell you that the copper content in Finolex cables is higher than its competitors and so the company can get away charging a higher price for a commoditised product.
At Value Research we give prominence to data and, in short listing stocks for the Anniversary Issue, we did look at numbers and valuations to identify stocks that you can invest even in this market that has significantly gone up. To identify these stocks, we included companies that do not resort to high levels of debt and businesses that have returns on capital over the bank rate. We excluded companies that have already run-up in the stock markets, because even the best companies bought at very high valuations will not give you the same results.
Finally, we arrived based on these parameters 10 hand-picked stocks from as varied sectors and market capitalisation as possible with the intent that investing in them would build wealth in the long run. Follow our selection and reap the rewards. Happy Investing!
We recommend the following stocks:
- AIA Engineering
Watch out this space for other recommendations.