Tuesday, August 30, 2016

My Investment Philosophy - Knowledge, Discipline and Patience

Currently, I have low financial liabilities and long term financial goals. So, I buy stocks with the objective to hold them for long term horizon.

        While identifying the stock for investment, I focus on following parameter
  • Business – I look for companies in flourishing sector. Then I select the companies with simple and easy to understand business. 
  • Companies - I prefer the companies operating over long term in past. Thereby analyze its sustainable competitive advantage (moat) and durability of that advantage. This is followed by analyzing Company’s product portfolio to determine whether it commands premium pricing?
  •  Management – I look for any increase or decrease in promoter stake in the company in recent years. I prefer companies that are transparent and honesty in communication to shareholders. I check whether the management is committed in its strategy. I scan through annual reports to identify whether effective corporate governance structure is in place. Management visions is analyzed by reading conference call transcripts, Management Discussion and Analysis or interviews with leading financial media.
  • Financials - I study 10-year historical performance track. For this, I primarily focus on sales growth (consistent earning power), EBITDA margin, Return on equity (moat will be reflected in higher ROE), Debt/Equity, free cash flow, Dividend payout and price to earnings ratio. 
  • Stock price – Value investing principles focuses on buying undervalued stocks, thereby ensure there is margin of safety. Determine intrinsic value and compare with current stock price, observe the stock and buy on dips.

        Other General Considerations
  • Observing companies product profile – I have inculcated that habit of observing the products of the companies. When Patanjali products started getting greater shelf spaces, I started tracking sale of FMCG gaints. I also compare company's product with competitors and check customer's review on online shopping websites as a part of stock analysis. 
  • I have decided to invest portion of salary each month and then spend the balance portion. I do not borrow to invest in equity
  • I study annual reports and other information about the company from finance media to identify the next multi bagger stock.
  • I evaluate the stocks position by considering whether the stock I am planning to buy or holding is affected by any of the behavioral Bias like trend chasing, disposition effect, familiarity bias, Endowment or other bias. 
  • I have experienced that more I study about the company, more I get biased about the stock. So, I have decided to make each investment decision independent of previous decision.

Stock pick - Asian Paints
  • Asian Paints (AP) is in paints industry since 1945. AP business model is easy to understand. 
  • Currently, it is a market leader in decorative paints, varnish and enamel with around 50% market share. 
  • Its wide range of products (new product launches each year), geographies (customer in 65 countries) and wide distribution (30,000 dealers and 300 idea stores). AP is shifting from being only paints company to home d├ęcor company (adding modern kitchen space and bathroom fitting products). It has strong brand recallability. 
  • Its promoter holding of 52.79% has been relatively constant. The management adheres to its core competency and have effectively integrated all mergers and acquisition. AP has effective corporate governance system in place. 
  • AP has recorded 15.5% average annual revenue growth over 2007 - 2016 and average annual EBITDA growth of 19.2% during same period. It has consistently maintained Return on capital employed over 45% with positive free cash flow.