28 March 2017

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Personal Framework for Investing - Discussing Methods to Select and Invest on Great Companies

investing checklist and ideas ((familyfinance.in))
Here is my Personal Intellectual Framework for making successful investments and this is for my blog readers. Remember, it is just not some lines or words but it is a practice of mine and I am following this framework to find and invest on right companies. This framework is 10+ years old by its age and It is my starting point to make serious stock investment decisions such as finding, evaluating, finalizing stocks to invest as well as make selling decisions. I am sure it is a valuable treasure for investors and they never find such personal investing framework anywhere in internet or no one will share such secret information to other. I have kept this information in my hand for long time without sharing to anyone.

This framework discussing 3 factors to select a stock to invest. The Business factor, Management Factor and finally the Financial part. You will enjoy this points and certainly wonder on the simple steps I am sharing with you.

MY PROMISE: Selecting and investing companies as per these factors in mind would make you wealthy. This words are from my personal experience. Also remember, lots of homework required to identify the business that are compliant to these factors****

Business Factors

1.    Business that you willing to invest should be understandable one. It should have durable competitive advantage to its brand of products or services than personnel. Market monopolistic position would be excellent. (e.g. Pidilite, ITC in India)

2.    Shouldn’t be operating in any price competitive commodity business where lots of competitors and possible debt burden exists. (e.g. Steel companies and power companies)

3.    Company should have considerable market capitalization and the operating space shouldn’t be territorial, but it should be a mainstream business. Business should not operate in any hot or fast booming sectors like internet, IT, telecom, real estate, constructions, but not limited to… It also shouldn’t from a sector where having organized labor forces that controls the business i.e.  Airlines, shipping etc.. and should not face any labor issues that affect company production and business with huge impact.

4.    Should have at least 10 years operating history in the market and capable to retain business superiority for next 10 years by not spending much retained earnings for tremendous business growth. (e.g: Nestle)

5.    Business, whether it have durable competitive advantage or not, should NOT have any lose making sister concern and/or never acquire a firm that have lose making business. Acquiring another durable competitive company would be fantastic. Also, the business should not be a regular acquirer of businesses using its retained earnings and/or through applying loan/debt. (e.g. Kingfisher Airlines to profit making United Spirits)

6.    Business shouldn’t have immediate competitors with similar product or services to take advantage in case of any temporary business issues due to a third reason. (e.g. Pidilite)

7.    Business should have excellent sales network across the nation preferably internationally, excellent and cost effective research facility, efficient advertising plans and capable costing decision. (e.g. ITC)

8.    Business shouldn’t face any serious legal cases (which affect business economics), from any authorities i.e. tax departments, local or other governments, countries, courts, other companies etc.. Its product or services shouldn’t have a present or past history of experiencing ban from any local or international authorities.

9.    Business should have clean images with exchange authorities and should not have experienced any kind of loan denial from any financial organization in the country or internationally. (e.g. Sathyam computers faced this issue)

10.    Business should have its product or service capable to adjust prices based on inflation without losing customers due to such actions. (e.g. Gillette)

Management Factors

11.    Business should have a perfect management in place who works for shareholders than self benefits. Management should be highly rational and dedicated with clean images. (e.g. Berkshire Hathaway)

12.    Capable to act in advance to retain business superiority on changing market conditions and to prevent possible competitor existence. (e.g. Britannia came with 2 piece biscuit sachets during recession)

13.    Management should be investor friendly and have nature of fulfilling each promise they have made to them each year. (e.g. Asian Paints)

14.    Management should not support extravaganza and should NOT be a member in any groups of managers receiving high pay packages and perks. (e.g. Kisgfisher and Reliance. Kingfisher was notorious by unethically giving high pay packages to its executives that later lead the company to failure and second is sponsoring extravagant events)

15.    Management shouldn’t have a history of business, finance, tax and costing fraudulence. (e.g. Sathyam Computers)

Financial Factors

16.    Business should have high profit margin along with high inventory turnover. It should at least have any one of these quality.

17.    Should have posted considerable and consistent growth on Return on Equity (RoE), Return on Capital Employed (RoCE) and Per Share Earnings for past 10 years as least.

18.    Business should have posted consistent growth in sales, net profit for the last 10 years including present year. There shouldn’t be any variation in these figures unless it is justifiable through with required evidence.

19.    Debt to Equity ratio of the company should be in a comfortable position and the total debt, if any, should be less or equal to 1 or 2 years net profits of the company. Banks and financial institutions have conditional exemption from it.

20.    Operating cash flow of the business should always positive in each year and business should not have a habit of spending considerable amount to maintain business, research activities.

21.    Should have a consistent dividend payout history for at least last 10 years with a considerable growth in each year (e.g. Wipro)

22.    Business considerably has a habit of re-purchasing shares, but shouldn’t issue new shares to the public in any way.

23.    Ideally have a price to sales ratio less than .75

24.    Ideally have an initial rate of return at the time of making investment should more than 12 to 15%. (per share earnings/share price)

Following above factors are enough for me to be a best investor. Ask me if you have any questions.

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