The manner in which Banyan Tree Advisors invests your money is determined ultimately by the goals we have set for all our clients, including you. These goals are simple, and are listed below in their order of priority: Protect your capital, beat the risk free rate of return, and beat the equity index rate of return. To read more about our objectives for our clients, read this: ‘Safety First’. Have we achieved our goals for our investors in the past? You can see our track record on Page 8 of our disclosure document which is attached here.
To achieve our goals for our clients, we follow these two principles:
- Invest in high quality companies.
- Buy their stocks at sensible prices.
Buying high quality companies: When we invest your money in a stock, we seek to buy a piece of the underlying business, and that business must be of high quality. What makes a high quality business?
- The company should have survived over a reasonably long period of time.
- The company should be consistently profitable, with a return on equity of at least 15% – the higher, the better.
- The company should be growing its revenues at a reasonable clip.
- The company should have a strong balance sheet, with very little debt
- The company should be generating free cash flows ie cash left after making all investments
- The company should pay dividends at a steady rate, and taxes at a rate close to the maximum rate prescribed by the government.
Read more about ‘Buying the Business’.
Buying the stock at the right price: As important as buying the right company, is buying it at the right price so that your investment has a margin of safety, and you also improve its potential for appreciation. We have seen many instances of great companies that when purchased at too high a price led to disappointing decade long returns.
Ideally, if we can buy into a great company, where the intrinsic worth of the company is growing at a rate that is well above average, and if we can buy at prices that are at a reasonable discount to its intrinsic worth, we believe that we have hit a gold mine. In order to identify such opportunities, one needs great clarity on what is the intrinsic worth of the business what is the right price one can pay for the stock.
We spend a large proportion of our time in identifying the ‘right price’ at which to buy into a great company. When we look at valuations, we don’t look at just absolute valuations, but valuations that are statistically low. To do this, we typically study the history of the company over the past 15-20 years, and use a combination of methods to arrive at the right price that we should be willing to pay for the company.
However, for sub-par companies, we believe there is no right price; it is important to know when not to try and value some assets. For those companies where one can’t identify a safe price to invest, it is wiser to skip the opportunities. There are enough fishes in this ocean – we fish in a pond of companies which have had a stable history, consistent growth and a greater predictability of the business, and where it is possible to arrive at the ‘Right Price’ with a reasonably high degree of accuracy.