Steady does it


Director, Banyan Tree Advisors

December 20, 2011

Invest only in companies that have been growing at a consistent pace for long periods, and you won’t have reason to regret.

Stock markets have been around for almost 1,000 years. The earliest I have heard of shares of companies being traded is around 1050 AD. But it could well date further back, as the history of the stock market has not been chronicled well enough. But there’s one thing I am reasonably certain of: no company, however good, has lasted as long.

If we look at the Indian stock market, there are very few companies that are over 50 years old and are still growing at a consistent pace. As an investment policy, I feel that the companies I invest in must generate a growth rate in excess of the GDP rate of growth.

Few and far between. Looking at the 6,000-odd listed companies, I find very few worth writing about — or writing home about. Most of them came into existence during IPO booms; the 1991-94 boom must have spawned over 1,000 listed companies. But fewer than 200 of these are likely to be active today. By active, I mean a$ growth rate in excess of the GDP rate of growth on a consistent basis.

There are many reasons why companies are unable to grow consistently over long periods. Perhaps cheaper and better substitutes have been found for a company’s products — as when plastic chairs replace steel ones. Or maybe the management is wrangling for control of the company, or is simply incompetent or greedy.

On the other hand are the companies that have been chugging along at a steady pace, such as Hindustan Lever, Nestle and Wipro, which have seen growth rates in excess of 15 per cent for a long time. These are the Gavaskars of the corporate world — they play for the country for many years and make significant contributions. Others such as Asian Paints or L&T are like Mohinder Amarnath — slower but still making a regular contribution.

Play it safe. If you want to protect your capital, stick to investing in companies that have been growing at a consistent pace for long periods. Leave the turnaround stories, the cyclical plays and the IPOs from unknown promoters to investors who are closer to the story and know the company far better than you do. Stick to the ‘steady performers’ and
you’ll be happy.

If you want to play it safe, pick up these stocks at an attractive price. If you can get them at a PE ratio less than 8, it would be great. Or you could follow this rule, which an experienced investor once revealed… He had a list of 20 stocks that he believed were truly great and would stand the test of time. He waited till they were available at half their previous highs and then picked them up.

Nestle was quoting at 40 per cent of its previous high about three months ago. HDFC was available at a PE less than 7 for the past three years despite growing at 15 per cent consistently. In today’s market, such opportunities abound. Asian Paints and Marico are available at a PE of about 8 while chugging along at a steady 10 per cent. And the best bit is that much of this information is readily available — you don’t have to expend time and energy digging it out.

With this approach, you might not multiply your returns manifold in a single year, but you have a good chance of a 30 per cent return every year. You also have very low chances of losing money.

One final piece of information that just might convince you: Peter Lynch, George Soros and Warren Buffett have all averaged less than 40 per cent a year in their investing career. Surely, you wouldn’t mind being in that league.