See what happens when Power of Compounding shakes hands with Power of Philosophy
Someone once asked me, “Equity markets have many stories of astounding stock level returns, then why is it that most investors make only mediocre returns?” My answer is, simple 2 reasons, “one, we are restricted by our own vision, and abilities, second, we are resistant to change with time”. It’s a blessing that we live in such a democratic world where there is no hoarding of knowledge and opportunities. What really limits us is our own vision.
For extra-ordinary results, one needs to put together extra-ordinary work. And, in this context, I would like to share Purnartha’s Investment Research Philosophy’ which surely is an extra-ordinary outcome of Mr. Rahul Rathi years of hard work. Rahul is the founder and chairman of Purnartha and is a strong believer of “Vasudevam Kutabakam”, which expresses business integrity, and means what is not good for me and my family cannot be good for my clients.
I am actually revealing a secret to stupendous wealth creation. But, it’s not a quick formula to do a magic, as what really matters is impeccable execution. And, this is where Purnartha has demonstrated perfection, years after years, over almost a decade. It has shown unwavering conviction to its philosophy.
Let understand what is it this philosophy. In a few word, it is “Invest in quality businesses for a long term, and hold on, till the time the business is performing”. But, its’ easier said than done. Each of the following parts put together makes Purnartha Investment Philosophy and we understand that the whole is always greater its parts”: –
1. Min 11 Years’ Operating History
2. Volume Growth of 10% + Sales Growth of 20%
3. Operating Cash Flow Growth of 20%
4. Debt Free Balance-sheet (for a non-financial company)
5. Promoters Skin in the Game
Let’s have a deep dive on each and every point
● A 11 years’ operating History
Why 11 years? 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 shows 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”. I always say this to my existing and prospective who are looking to invest in equities. “We are all part of markets and we will also fall when markets fall, but we will recover much faster than markets when it recovers, because of the strength of our businesses”
● Volume growth of 10% (1.5x-3x of GDP growth)
Why volume growth? As 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. All businesses grow Y-o-Y in spite of great markets and good sector growth. 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
● Sales Growth of 18-20%
Sales should grow by 20%? True, because with min 10% volumes growth + inflation, + brand premium = Sales value growth.
● Operating cash flow growth of 20%
Now Whats That? In the end, what matters is what comes in the bank account, after all, cash Is king. Also, this number is verified both by independent auditors and bank and is rarely manipulated.
Purnartha looks for companies that not only show Y-o-Y volumes grows by 10% but also sales growth of 20% along with operating cash flow growth of 20%.
● Debt Free (for a non-financial company)
Debt Free? If a company’s Y-o-Y volumes grows by 10%, sales by 20% and operating cash flow by 20%, every four years you are doubling in terms of cash, why will a company need debt. Even if it wants to expand faster, Purnartha looks for those companies that rely on internal funds over raising debt. Purnartha believes that these companies are more agile and think more creatively without any burden. 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.
● Promoters skin in the Game
Now What Does That Mean? Should promoters hold more than 70%-80% of the company’s stake..Not really. Here, what Purnartha looks for is “how much time promoter is spending in the company”. We want our promoters to be focused and invest close to 100% of their professional bandwidth the company being picked for investment.
All the above parameters filter the listed space of approx 6000 stocks to 45 stocks. It’s not the end. At Purnartha, life starts with these 45 stocks. The end objective is to build a very concentrated portfolio of 6-8 companies, so these companies become day in day out companions on which Purnartha does further research and keeps a unique watch both on financials and non-financial aspects.
Team comprises of Fundamental Analysts, and Investigative Journalists. Put together this team ensures that the Investee company keeps delivering on all parameters. While Fundamental Analysts immerse themselves in the financial statements, Investigative Journalists go on the ground to verify company’s financial facts and collected commentary. This is unique to Purnartha’s research philosophy as it takes the perspective beyond financial statements. This team meets with all the following stakeholders:-
● Bankers – How is company is dealing with the investments and other financial matters?
● Suppliers – Whether the suppliers have got orders in line with the growth plans of the company?
● Employees – How are employees treated and how positive and aggressive they are about company prospects?
● Competition – How high they talk about the company. Is there any threat worries them?
When is said, extra-ordinary, it meant it, and this is what is dictated by Purnartha’s high concentrated strategy as while creating an investment portfolio, “What one buys is very important, however, How much one buys is 10 times more important” Most successful investors have created 90% of wealth in just 2-3 businesses and Purnartha also backs its conviction to few stocks and for it follows a strategy of high conviction portfolio of 6-8 businesses only. Hence, If Purnartha is not convinced to buy even 10% of the portfolio in the business, it prefers to rather wait and study more to gather the conviction first.
Well making right concentrated investments, and sleep over it. Is it over? Not really, as there is nothing like retirement here. As that would mean, businesses are held forever. Which is not the case here as long term doesn’t mean forever. Daily effort of research work continues, and till the times businesses show adherence to our philosophy, we are happy staying invested. There may be times when a business faces some headwinds for some time. Issues come and go, what Purnartha focuses upon is type & because that’s leading an issue, for example, is it a supply issue or a demand issue? And if our selected businesses face demand issues in a particular quarter, we may wait for our businesses to come back as they are supposedly strong businesses. However, we keep a close watch and verify fall in numbers by meeting with stake holders, and if it doesn’t comeback over a few quarters, for some reason, we prefer selling it and moving on the next one. In this entire journey we make sure that we capture, the major part o company’s growth.
The key to wealth creation in investing is a long term research backed visionary approach coupled with courage to take actions, when needed. Purnartha’s conservative research methodology exactly does this, and strives to selects the best companies that have very strong growth aspirations, match middle class values such as little or no debt, and where owners have their skin in the game.
Its’ often said among successful wealthy investors that its only 1% of skill and 99% is temperament. Not surprisingly, hence, investors need expert hand holding and right advice at the right time with one and clear goal i.e. extra ordinary results which is what Purnartha has been delivering over years for its clients…
We at PMS AIF World do un-paralleled research before making our client invest, and hereby recognize Purnartha as one of best equity investment and advisory services for long term informed investors.