Yesterday I had an interesting chat with one of our customers. We discussed various news and events. He suggested that we should include these into our research process. While its very valid point that we should keep track of news and developments, but getting influenced by this is very foolhardy.
Few days back, another customer was of opinion that Tata Motors has very poor product line and service of Passenger vehicle segment. Why would you recommend us to buy the company? But Passenger Vehicles forms less than 5% of the company’s sales, why should I worry. Unless large capital is employed, I wouldn’t worry about that segment.
Another query was, one of the battery companies uses promoter’s land for its plant, isn’t it bad corporate governance? But the business model doesn’t get affected and valuation doesn’t change.
And yet another one was, cash was found in premises of one of the leading conglomerates of India, shall we sell all his companies? We can give benefit of doubt due to labour oriented business and monitor future events closely rather than irrationally selling all other group companies.
So, how do you decide which event is important?
Now as a long term investor, I am sharing how I think. As soon as I read any news or event of a particular company, I find out its implication on the earnings power of the company or say long term valuation of a company. If you think an event is not material, I just keep it in mind while assessing quarterly and yearly numbers of that company in future.
My first opinion about any company is always about core business model of a company. Quite often irregularities are found in bad business model, since business model can’t generate enough money for the promoters. Second in my list comes, accounting practices and capital allocation. Does the promoter or CEO allocate money rationally or aggressively? Third, is this company really worth part of my core portfolio?
With this process in mind, I have found just 200-250 companies worth investing out of 5000 companies.
However, there are so many good businesses run by average to bad owners. Most of them are in the regulated sector. I can’t simply discard all of them. I rather make smaller bets.
Thus, even if the business model is good and available at a right price, but I have found irregularities in the past I should rather control my risk. I would never invest more than 2-3% of my portfolio in that stock irrespective of how favourable the valuation is! This gives me sound sleep and no regret of missing an opportunity.
Some corporates have history of bad capital allocation including one of the heavy index weights. I prefer to subscribe to its bonds rather than buying the company shares. Similarly for companies in the utilities sector like Telecom & Power, bonds will yield better returns over equity.
We always insist to focus on bigger picture rather than small events. Don’t get influenced by small developments and if you are not comfortable, move out of that stock. Investing is supposed to be stress-free. If it isn’t, you are working for money rather than Money Working 4 you.
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