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From ignorance of ignorance to QGLP

Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services shares 10 key lessons that shaped how he approaches investing today

From ignorance of ignorance to QGLP

My stock-investing journey of over 30 years has been full of learning - from ignorance of ignorance at the start to now my proprietary investing process QGLP (more about this in a bit). I present 10 key lessons here.

1. Avoid leverage
Never borrow to invest in the stock market. Assuming a 1:1 debt-equity, a 50 per cent fall in the market will erode 100 per cent of your net worth and put you out of the game. Avoiding leverage allows you to take the booms and busts of the market in your stride.

2. Have a role model
Till 1994, much of my understanding of equity investing was EPS × P/E = Stock price. Looking back, I call this ignorance of ignorance. Then in 1994, I came across Warren Buffett's annual letters. From 1995 onwards, I also started attending Berkshire Hathaway's annual general meetings. This transformed my understanding of equity investing. For instance, I slashed my portfolio from 200 stocks to about 15. It pays off significantly to have a role model early in your stock-market journey. You can always improve upon the learning from them, but at least you get a solid start.

3. Power of compounding
The secret to successful stock investing is understanding the power of compounding. Compounding works best over the long term. For instance, a 25 per cent return over 10 years results in an appreciation of 9.3 times. However, the same over 30 years results in an appreciation of 808 times. The number of years held is only three times higher, but the appreciation is 87 times higher.

4. Great, Good, Gruesome
This lesson is from Warren Buffett's 2007 annual letter. All companies can be classified into Great, Good and Gruesome. Great companies are those whose return on capital is not only significantly higher than the cost of capital but also rises with every passing year. They require virtually no capital to grow. Good companies are those that earn a return on capital higher than the cost of capital but require significant investments to grow. Gruesome companies earn a return on capital lower than the cost of capital and are compelled to invest more at these lower rates in order to grow. The key lesson is to avoid Gruesome companies at all cost, no matter how cheaply valued they appear to be.

5. Management, the 90% rule of investing
Investment guru Philip Fisher in his book Path to Wealth through Common Stocks says, "In equity investing, management is 90%, industry 9% and 1% everything else." I assess quality of management by three criteria: unquestionable integrity, demonstrable competence and growth mindset. In fact, my few investment mistakes have been mainly because of a wrong judgement of management quality.

6. Value migration
Value migration is a powerful concept discussed by Adrian Slywotzky in a book by the same name. It essentially means that value (i.e., profits, market cap) migrates from obsolete business models to new ones, which better serve customer priorities. The classic example is that of the telecom sector, where significant value has migrated from fixed-line telephony to wireless telephony. Other examples are (1) the banking sector, where value is migrating from state-owned banks to private banks and (2) the Indian IT sector, where value has migrated from the developed markets such as US to lowcost countries such as India. Value migration gives its beneficiaries a long growth runway.

7. Growth is a lollapalooza
In equity investing, growth is God. The markets handsomely reward growth in companies' earnings. However, there is a no fixed formula for growth. For instance, it may come through changes in CVPM (cost, volume, price, mix), operating/ financial leverage, value migration, regulatory changes, etc. In other words, growth is a lollapalooza, i.e., the result of a variety of factors coming together.

8. QGLP
Every year for the last 24 years, I author the Motilal Oswal Annual Wealth Creation Study. Every study discusses a framework, including some of those mentioned above. These studies and frameworks culminated in the form of a proprietary investment process which I call QGLP - Quality (of business and management), Growth (in earnings), Longevity (of Quality and Growth), at reasonable Price. Investors should ideally come up with a time-tested investment process of their own. If not, they are better off investing with fund managers who have a wellarticulated investment philosophy or process.

9. India's NTD opportunity
This is a powerful framework to strengthen conviction in the India growth story. It took India 60 years since independence to clock its first trillion dollar of GDP. Post that, every next trillion dollar (NTD) of GDP is coming in at a successively shorter period due to the power of compounding on a higher base. When per capita income rises, consumer spending on necessities does not increase in the same proportion, leading to a huge growth in discretionary spend, such as on white goods, vehicles, travel, etc.

10. Price is what you pay, value is what you get
It is said that in the stock market, people know the price of everything but the value of nothing. Warren Buffett has made the distinction very clear by saying, "Price is what you pay, value is what you get." Using whatever methodology, investors must independently arrive at the value of companies and juxtapose the same with the price. If value is higher than the price, then there's a case to buy. If value is lower than the price, then the stock should be avoided or sold if already held. The above are just a few of my key investing lessons. In closing, it can be said that equity markets are getting bigger and more sophisticated by the day. There's enough room for new learning and new masters. You too can be one!