The legendary investor Warren Buffet made his fortune by collecting companies (collecting shares of companies) which have an exemplary track record, bright and long term future prospects and available at a good price. The qualitative parameters he looked at is a sound and able management, which behaves with integrity towards the shareholders. The valuation parameters he looked at is that the company should be available at a reasonable price as compared to its value. Calculating value of a company is a complicated task for an average investor, but one can gauge a company’s value in terms of its median Price to Earnings ratio (P/E). You then buy the shares when they are available at a discount to its median P/E. While considering data about median P/E, you can refer to financial databases like Bloomberg and Capitaline.
We can do the same thing by investing in shares of companies which have an exemplary track record and meet certain important parameters. The parameters one should look at is Operating margin, Book value per share, Return on Equity, Return on Capital employed, Debt to Equity ratio, P/E, Price to Book Value (P/B), Inventory turnover Ratio, Debtor’s turnover Ratio, Creditor’s turnover ratio, Capital Expenditure for maintenance, Capital Expenditure for growth etc. We should keep a track on an annual basis of how the company’s fundamental characteristics and management are changing. It will help to read about the company and its history and the background of its directors on Wikipedia and other available and reliable sources of information. After shortlisting such companies from the universe of available stocks listed on the BSE or NSE, we can make a collection of companies, the same way in which we collect out favorite songs, albums, watches jewelry etc. We should take care that the companies so selected meet most of our expectations and are should not exceed a certain number, otherwise the portfolio will get over-diversified. Not all of these companies will be available at the right price, all the time, hence, we should keep an eye for any bad news or event, which may bring down the price of these companies, temporarily. We should take care that we don’t run after multi-baggers and short term gainers, as that strategy is a tactical strategy and can be used as a supplementary strategy in conjunction with the long term, i.e. strategic strategy.
The collection so developed can be used to meet our expenses, after we retire in a phased manner. The balance left in the collection can be used to gift it to our loved one’s after we pass away or for some charitable purpose.
Mungekar Wealth 