I often see people obsessed with research reports, next turnaround, next amazon and forecasting growth when they know they can’t be right. what should one do?

According to me, retail investors’ job is to find companies which *regularly* earn return on capital employed more than 20% and stick to good promoters. Another point is one should avoid firms going into obsolescence (Coal, newspapers) or highly cyclical. (steel, iron & their products). If you just follow these two things, you will ultimately build a good watchlist.

Coming to buying decision. Be honest to yourself that you ain’t Buffett and you need diversification because you will never know more everything about a business and volatility. So keep 20-30 stocks to start with. Go on reducing as you start understanding business very well (After 4-5 years)

What is a good price? It is subjective but anyone would know that if a business has high ROCE it may enjoy more than 15X PE. but after growth period is over, it tends to fall back to 15X PE. so it is not wise to buy any stock above 25X however bright the prospects. remember as a retail investor our job is not to win but not lose. These two mean very different things in stock market.

In past nifty 50, next 50 PE ratio has been 17-20X. Now these indices have one of the finest businesses on an aggregate. If these have enjoyed just 17-20X I wonder why you would pay stupid businesses like venkys, godrej agrovet and Avanti a very high PE.

Often in bull market, parasites brokers convince fund managers to pick stocks even at higher PEs. They together take the PE up. But reality is, every one knows if government bond earns 7%, an average business which earns just cost of capital will enjoy not more than 14X PE. But since fund managers are competing with other fund managers and not bothered about their investors, they keeping playing the game. Few shameless fund managers even pick stocks like reliance which has history of fooling investors. It is other people’s money, so who cares.

Following this strategy, you may underperform over short term when markets go into euphoria. But over 3-5 years, you will be leading everyone by huge margins.

Source: LINK

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