Investing in companies is more of an art and a psychological subject than an intellectual one. You don't need to be a super intelligent person to earn from investing in equity shares. We firmly believe that wealth can be generated over long term with superb combination of discipline, psychology and behavioural factors. A person needs to educate himself at every stage of life and stick to their investment plan to see abnormal results. Returns can be above normal for long period as long as one avoids serious mistakes. Lot of investment gurus have demonstrated this and have generated loads of wealth in the past.
General tendency of the people is to correlate equity shares with speculation; just because it is listed on the exchanges doesn't mean you have to play with prices all the time. Conceptually, equity share implies a share in the business of the company. You are a financing partner in the business while the operational aspects are taken care-off by a professionally managed team called Board of Directors. Your opinion will be sought every time there is a major decision taken by the management in the form of ordinary or special resolution in the meeting. So, when investing in equity, mindset should be of an owner of the company rather than a price speculator.
There are almost 5000+ listed companies in Indian exchanges. We have a wide variety of companies and industries to choose amongst. All we have to do is... a little home work on how company earns from its operations, how their products are perceived by the consumers, how capable is the management, how is the management integrity, what are their growth plans, how well they utilise capital & so on. While short-listing the company to invest, we focus on following four parameters:
1. Quality of the Management
2. Rate of increase in Profits for last 5 years
3. Debt level of the Company
4. Product Profile of the Company
Once the company is filtered through these parameters, then we check valuations for making a final leap.
Investing time horizon plays a greater role while investing in equity shares. The stock prices may remain irrational for a short period of time but when the time horizon increases, the stock prices tend to normalise and follow the path of profits earned by the company. Based on our experience, we can say that if your investing time horizon is
- Less than one year – you are in the wrong place to start with.
- Less than three years – valuations is important, very important while investing in shares.
- More than five years – the quality of the business is more important than the valuations. Even if you buy companies a little expensive, earnings will eventually catch-up valuations.