Tips to pick the right stocks and make big gains

Raamdeo's base argument is that India's stock market merely mirrors the national economy, which is poised for big things, notes Mudar Patherya.

My refuge in this meltdown has been Raamdeo Agrawal's 'The Art of Wealth Creation.' 

Raamdeo's formula is that successful stock picking - his index is 100x, no less - is captured in the acronym of SQGLP, independently standing for Small size x Quality of business and management x Growth in earnings x Longevity of quality and growth and favourable Purchase price. 

Raamdeo's 100x has not been wished out of thin air; the broad Indian stock market appreciated 100-fold in the past three decades (annualised return of 17 per cent).

So, his contention is that when you add discipline, one can generate 25 per cent per annum and generate 100x in less time. 

Raamdeo's base argument is that India's stock market merely mirrors the national economy, which is poised for big things.

India took 60 years to get to its first $1 trillion of the gross domestic product (GDP) and only seven years for its next trillion (politely omitting to mention that this was achieved in the face of a slack government and global slowdown) and, hence, likely to take five years for the third trillion and four years for the fourth trillion.

Just the kind of numbers we need to paste on a felt-board when we panic ourselves into inaction when markets melt. 

Raamdeo is a proponent of buying the right company and then leave it alone (as long as the wind is right), as opposed to the hyperactive investing school that would prefer to cash out of multi-baggers with the objective of reinvesting the loot into the next prospective multi-bagger.

Raamdeo highlights the case of Nestle: between 1996 and 2009, Nestle's return on equity (RoE) strengthened from 22 per cent to more than 120 per cent; even following its massive capital expenditure of the past few years, its December 2013 RoE was still an impressive 54 per cent. Correspondingly, its 1996 profit after tax of Rs 53 crore was Rs 1,108 crore in 2013, slowdown or no slowdown. 

There are telling points in his work. Often, contrary to perception, opportunity is not fleeting. Shriram Finance was available at a PE ratio of 1x in March 2001, even as it had a RoE of 25 per cent.

Even two years after GRUH had been acquired by the HDFC Group, the company was available for a market cap of Rs 46 crore (Rs 460 million) with a price/book of less than 0.7x, following which the stock has 170-folded. Ajanta Pharma was available for a PE of less than 7x in March 2012. 

There is another Raamdeo nugget: To buy into blue chips when the dividend yield is higher than the ten-year median and PE lower than the 10-year median, or dividend yield greater than three per cent. 

The big argument of what this country can do comes from an anonymous paragraph on page 48. India (accounts for 16 per cent of the global population) even as its GDP is less than 2.5 per cent of the global GDP. 

If the Modi government's spin team did no more than merely highlight this one mismatch, there would be more money coming into Indian equities than probably ever before.