5-step guide to locating a 'wealth creator'

The first rule to investing is ‘Don’t lose money’. The second rule to investing is ‘Don’t forget rule no. 1’! It is essential to stick to these rules when it comes to investing, in order to avoid the possibility of capital erosion.


1. Assess the entry barriers created by a company

Entry barrier should be preferably intellectual in character

Remember, a stock is nothing but a stake in the company’s business. So, observe the company’s business and the entry barriers created by it. The entry barrier should be more ‘intellectual’ in character rather than ‘physical’. This is because while it is next to impossible to compete with a strong brand (an intellectual barrier), competitive advantage associated with a piece of land (a physical barrier) disappears when a competitor acquires one as well.

Strong brands such as ‘Thums-Up’, ‘Parle-G’, etc. have enabled their companies to retain the top spot. However, at times, there could be exceptions. For instance, the entry barrier associated with TISCO would be its large base of iron ore and coal, which allows it to lower its raw material cost drastically vis-à-vis its competitors for long time to come.

Entry barrier should be long-lasting

An entry barrier should not only be strong, but also long lasting. Such companies will keep making money because their entry barriers keep working for them. For instance, Britannia may not be the best managed company but its strong brand continuously earns money for it.

Buy into such companies at the earliest

As an investor, buy into such businesses ahead of the crowd. If an entry barrier has been established very recently, it may not yet be exploited by the business. Accordingly, the market would not have valued it in the company’s share price.

For instance, when Financial Technologies (promoters of MCX) got its commodity exchange license and launched it, the popular opinion held was that it would be unable to execute the business well. But, today, it has emerged as a premier commodity exchange. Investing in such companies before the market sees their potential delivers best appreciation.

“Though difficult to practice, think ahead of the crowd”

2. Management should be competent and passionate

Choose companies that are led by a team and are competent and passionate. Both these attributes are equally important. Competence or passion alone will not work. An individual with a local degree combined with passion would have greater growth prospects than one who has a Harvard degree but no passion. A company like Pantaloon Retail is a shining example of how passion can create wealth.

“The definition of a great company is one that will remain great for many years”

3. Management should have integrity

Integrity is the most crucial quality that a company’s management must have. Such companies not only run their businesses in an honest manner, but, are honest to all their stakeholders, whether they are employees, the government or the shareholders.


If honesty is part of a company’s DNA, it will be fair to its smallest stakeholders – the minority retail shareholders. Companies such as Tata and Infosys have this quality, which has added to their growth and market attractiveness immensely.

“Without management integrity, no margin of safety can be high enough”

The above-mentioned three characteristics (long lasting intellectual entry barrier, competent and passionate management and integrity) must all be simultaneously present in a company that you choose to invest in.

4. Buy low

The price that you pay for a stock determines your rate of return. So, it is essential that you get your purchase price right. While some companies come out on top with respect to all the first three parameters, the returns falter when it comes to the purchase price.

For instance, HLL comes on top with respect to all the first three parameters but has not delivered as much as far as its stock goes. Its stock delivered a CAGR of approximately just 3 per cent over the last 5 years, when the market delivered a CAGR of approximately 44 per cent over the same period.

The quote - “In the bible it is said that love takes care of a lot of sins. In investments, purchase price takes care of a lot of mistakes” – is very apt. You can make mistakes on assessing the first three parameters, since they are subjective in nature, but getting the right purchase price covers up for all your mistakes. Hence, estimate the expected value / intrinsic value of the company and keep an adequate margin of safety in the purchase price.

“It is much more important to buy cheap than to sell dear”

5. Have patience

When you buy a house you don’t expect it to appreciate overnight. You look at its appreciation over a long period. The same goes with equity. After having bought a company that conforms to all the above four criteria, you need to have patience. Investing in equities is often driven by two emotions – greed and fear. And patience is the mantra that helps overcome these emotions. Patience makes the difference between investing and speculation. It’s like a fertiliser to the investment process.

“In reality, patience is crucial, but it is a rare commodity”

End note

Investing is laying out today’s money for more in the future. Its about performance of the underlying assets. Success in investing is the outcome of a disciplined approach.

Happy Investing !

IFCI FOR FREE FALL

OUR BTST- BALRAMPUR CHINI

FII Gross purchases Rs 3446 Cr, Gross sales Rs 5896 Cr, Net Sellers Rs 2449 Cr.
MF Gross Purchases Rs 895 Cr, Gross Sales Rs 514 Cr, Net Buyerss Rs 381 Cr.

OUR PICKS - RELCAP,PENINSULA LAND,ANUH PHARMA,DCB

SELL N SELL IFCI TILL 75-80 LEVELS ON OPENING

Today, Nifty has support at 5,672 and resistance at 5,847 and BSE Sensex has support at 18,872 and resistance at 19,384.

The market may edge higher amid steady-to-firm Asian markets. However, a major upmove is likely as traders are unlikely to build large positions ahead of a long weekend. The market remains closed on Friday, 21 December 2007 on account of Bakri Id and also on Tuesday, 25 December 2007 on account of Christmas.Traders are likely to start building positions towards the end of the month based on expectations of Q3 December 2007 results due next month.

As per provisional data, FIIs were net sellers of shares to the tune of Rs 1454.06 crore on Wednesday, 19 December 2007. Domestic funds bought shares worth a net Rs 350.60 crore on that day.

Stocks in News:

IFCI stake sale has been called off due to differences with Sterlite-Morgan Stanley consortium over management control.

Kingfisher and Deccan board approves merger.

Glenmark receives domestic patent for its asthma molecule, Oglemilast.

BHEL’s bid to build Rs84bn electricity-generation factory gets rejected.

Reliance Industries (RIL) is in talks with Tata Chemicals to sell KG basin gas.

Tata Power eyes shipping and logistics business and plans to raise Rs40bn from domestic and international market.

SAIL signs a pact with Rail Vikas for transportation of 5 lakh tons of imported coking coal per year.

Vale, world’s largest iron ore pellets manufacturer, is in talks with Tata Steel to set up a steel slab plant in Brazil.

Reliance Retail to enter food trading business as a part of major re-structuring of its food and grocery initiative.

Dabur India is planning acquisitions of an FMCG company in foods or personal care segment.

Hero Honda forays into used two-wheeler trading business under the ‘Hero Honda SURE!’ brand.

Union Bank is planning to enter mutual fund business and venture capital business.

Welspun India buys 76% stake in Portugal-based company for Rs600mn.

MRF plans to spend Rs5bn towards setting up a greenfield two-wheeler and four-wheeler tyre facility in TN.

Rolta India plans to enter real estate business through a group company, Rolta Infrastructure.

JK Tyres to hike tyre prices in next quarter.

EMCO promoters keen to raise stake in the company to 51%.

The telecom spectrum panel recommends the government to consider new allocation options, including auction.

Allahabad High Court asks UP Government to rework the cane state advisory price SAP) fixed by it for purchase of sugarcane.

LOTS OF OTHER INTRADAY,BTST,INVESTMENT CALLS

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