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The road to the best views in the hills is never straight and easy to navigate, however, when you reach the apex of a mountain – the journey makes it worth the travel.

When it comes to investing in equity, we see many stock stories that have generated 10x to 100x returns over 10 years, but, at a portfolio level, investors rarely experience this.  This is because investors make two mistakes : –

1) They focus too much on the price of the stock and too little on the financials of the business.

2) Investors do a lot of behavioral mistakes getting trapped between instincts of Greed and Fear.  

  • One, creating a too diversified portfolio whereby investors end up owning everything.
  • Two, selling a good business too early owning to fall in price because of some macro event, like Geo-political stress, COVID, etc.

To exhibit to investors that what are the traits of a portfolio with potential for 10x returns in 10 years we, PMS AIF WORLD, hosted a webinar to discuss in detail with Mr. Devendra Phadke, Portfolio Manager, at Purnartha Investment Advisors Private Limited.

PMS AIF WORLD, is a New Age Wealth Management Platform for HNIs and NRIs. We’re are backed by proprietary Analytics & Content and with us, investors make & hold INFORMED INVESTMENTS.

Mathematically to make 10 x returns in 10 years, simply two things are required.
1)  A time horizon of 10 Years
2)  25 % CAGR over the 10 years

The above stated two points are required together and not just one of them individually. It is easier said than done. Let us assume, an investor is prepared to invest with the horizon of 10 years, how to go about searching stocks with 25% CAGR potential. First of all, let us stocks seeing equities as stocks. For 10x in 10 years, one needs to start viewing equities as businesses. Each business has certain strengths, certain challenges, a certain level of competition.

Only those businesses that fulfill the following 5 filters are the ones that have the real potential to generate 10x in 10 years or more. Let’s understand them in detail.

Characteristics of businesses with return potential of 10x in 10 years

S.No.CharacteristicsCommentsExamples
1Company has min over the last 10-11 years of operating history10-11 years is a good enough time frame where we can see at least 2 economic cycles & 2 political cycles and some natural calamities. Its periods like these which show the true character of the company and quality of its promoters behind the business. “It’s not about how hard you fall but how fast you recover”.

Filter 1 : Min 10/11 years of operating history
Pidilite,
Page Industries,
Asian Paints,
Maruti
2Volume Growth along with Pricing PowerAs the economy grows, Market expands. But the expansion supports only those businesses which have a strong underlying product addressing the need of the consumers at an acceptable price. There are some companies which grow faster and hence identify these companies which grow faster than India’s GDP is what Y-o-Y volume growth tells us. Volumes growth + inflation, + brand premium = Sales value growth.

Filter 2 : Volume Growth of 10% + Sales Growth of 20%
Whirlpool,
Maruti,
Asian Paints,
Nestle
3Consistent Growing Operating Cash FlowIn the end, what matters is what comes in the bank account, after all, cash is a king. Also, this number is verified both by independent auditors and bank can rarely be manipulated.

Filter 3 : Operating Cash flow growth of 20%
Asian Paints,
Maruti,
Bajaj Finance
4Net cash companies - no debtIf a company’s Y-o-Y volumes grows by 10%, sales by 20% and operating cash flow by 20%, every 4 years you are doubling in terms of cash, why will a company need debt. Even if it wants to expand faster, look for those companies that rely on internal funds over raising debt. Even if it goes wrong, it can walk over the decision unlike a debt laden one which will have to serve the debt even after the wrong decision is over.

Filter 4 : Zero Debt Business
Asian Paints,
Avenue Supermarts,
Tata Consumer
5Promoter Skin in the GameAt least 70-80% of promotors’ income should come from this business. And, promoter should be focused to invest close to 100% of his professional bandwidth to this company being picked for investment.

Filter 5 : 70-80% promotors income and 100% professional bandwidth dependent on this business
Pidilite,
Avenue Supermarts

All of the factors in the table are equally important for selecting a good business – for example, Reliance Industries has just turned debt-free, but the growth might still be sublime for a while. One has to look at all these filters in combination and not individually. 

Allocation to each business is another element, that matters, a lot when creating a portfolio for 10x in 10 years

Allocation is like the most ignored aspect in wealth creation, the right allocation strategy can make or break portfolios, allocation strategy should ensure diversification and concentration at the same time.

Diversification should be achieved by diversifying the portfolio at the sectoral allocation level and buying only the best from each sector which ensures they provide superior returns and near market volatility, otherwise at a stock level equity portfolio should not be diversified too much. If one has done fairly good research as mentioned in the above 5 filters, a portfolio of 8 to 10 businesses is what needed for a potential return of 10x in 10 years.

 Challenges in equity investing on own : –

  • Exiting the business too early – Individual investors might often assign more value to the stock price than the intrinsic value of the business. Stock Prices change more often than Intrinsic value and investors tend to feel some action must be taken and lose out on wealth creation.
  • Not staying invested over longer-term – few days make the most returns in markets, and unfortunately, one can’t pick and select these days so one has to stay invested which becomes a challenge for most investors.
  • Discipline – stocks will correct in bad times, it’s important you stick around for these to recover if you believe the business is good.
  • Good businesses might not remain good always, so one needs to check regularly which might be difficult for individual investors

10x in 10 years is highly possible in Equities. All one needs is to ensure one creates a fairly concentrated portfolio of the right businesses based on 5 filters explained in this article, holds & be watchful of businesses over a longer time (evaluating its financials quarterly), keeps a minimum of 10 years of the horizon with discipline. Since all this could be highly difficult for a lot of investors, it is suggested to find the right fund manager.

We at PMS AIF World do un-paralleled analysis before making our client invest, and hereby recognize Purnartha as one of the credible investment advisory service for long term informed investors.

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