BEST WAY TO WEALTH CREATION?

Equities have great history of wealth generation till now. People still choose to bet on modern history but while investing, can we consider something as a best method to invest our hard earned money? 

Isn't it all about too much intelligence and time factor ? let's find our answer ahead...

Hello readers,

Today, I am going to tell you two stories of wealth generation that may be inspiring for you but choice is yours anyhow. Let’s get started.

Story 1:

Let's assume it's 2015 and you're new into markets, having few lakhs in your pocket to invest and you don't know much about fundamentals or/and technical part but you think you’re a smart investor and tried to replicate big players, and for that you searched about top 10 mutual funds and got to know that HDFC Bank is their common holding(mostly).

So, now you have stock name and money which is ready to invest, and as a new enthusiastic participant you bought the shares all in one go.

Price was in range of around ₹500 (High was ₹564 and low was ₹468.15) in 2015, Let’s say, you got it for ₹500 per share.

Now what?

You are lucky enough that your investment idea worked and 👇

Investments are now up around 200% as on 24th may closing.

 

Story 2:

Select your own stocks for investment. Is it easy? Yes, if you want to but not as easy as in Story 1.

There are 1920 stocks listed on NSE, 381 not even traded as on 31st march 2021. We have a universe of stocks. Here, we need a filter to get best out of them.

Now the question arises, “How to make your own filter?”

Basically, we need logical understanding only.

a) Market Capitalization must be above 1000 crore at-least because very small companies usually don't have good liquidity to entry and exit.

b) Promoter pledge- It should be below 1% or zero because it shows, company is not capable enough to take loans to run the business. The promoter could be pledging shares for various reasons – to meet the running capital requirement of business, for personal needs, or to fund new acquisitions.

c) Sales growth- year on year, it must be above industrial average or at-least above GDP of country. So, I would like to keep it 10% sales growth from last 10 year.

d) Price to earnings growth- this shows earning growth of company in comparison with its price to earnings. So, its good if companies earning growth is equal to or above its price to earnings.

e) If your Company is debt free, then it saves cost of interest payment and also, this is sign of healthy financials. So, Debt to Equity ratio is always better if it's low or zero.

f) Company must be capable enough to handle short obligations hassle free. To check that, we will check Current ratio, this shows comparison of current assets and current liabilities. So, basic idea is, it must be positive.

g) We understand that inflation is around 7-8% and government bond interest rates are around 6-7% and, if my company is generating lower than 8+7= 15% then what is the point to invest in that, right?

Hence, we got our filter, i.e., company must be earning more than 20% from last 10year average and this year too! 

Now we got 10 filter.

1) 10year average return on capital above 20%

2) 10year average return on equity above 20%

3) Return on equity above 20% (current year)

4) Return on capital employed above 20% (current year)

5) Market capitalization above ₹1000 crores

6) Promoter pledge below 1%

7) 10 year sales growth above 10%

8) PEG above 1

9) Debt to equity ratio below 0.1 to 1 is very healthy

10) Current ratio above 1

After this small work, you will get only 20-40 companies out of 1700+ Listed companies. Now, most important thing is your investment must be in company whose business is easy to understand for you.

When to buy? It is a serious question. In this kind of inflated market, advisors usually suggest buy in SIPs. Meaning Investor should invest money in a systematic manner and if market crash badly and shares drop then maybe you got opportunity to buy in lump-sum.

Below picture shows the applied filter.

Below pictures shows the result of applied filter.

I checked their previous 5year returns, some of them are trading with more than 1000% profits. Merely, one them is negative. If we calculate approximately average of just last 5year mostly are trading at 200-400% rise.

We cannot say, if this is the best time to invest or not, but choosing a manual SIP method of investment in place of lump-sum feels safer. SIPs are just like when someone is buying something at regular intervals with a fixed amount. Mostly, people do SIPs in mutual funds but it can be done in any asset class manually.

That's all from my side on this simple investing approach, I hope you learned logics behind :) 

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Disclaimer: we may or may not be invested in any of stocks discussed above and this blog is written for educational purposes only.

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Thank you 😇