Investment Philosophy

Investment Philosophy


  • The key question we are asking here is whether a company has the potential to grow its revenues for a long period of time in the future

  • Scalability can come from growth of the industry in which the company is present

  • If the industry is not growing, a company can grow its revenues by grabbing market share from its competitors

  • We prefer companies that can grow their earnings stream and cash flows over a long period of time irrespective of the economic environment

  • Without scalability, a company fails to meet our first criteria of being a compounding machine



  • The key question we ask here is if the growth of the company will be PROFITABLE?

  • A company which earns a high return on capital and at the same time is growing is always preferable to a company which is growing but earning very low return on capital – Just ask some one who has invested in the airline carriers!

  • Therefore, we don’t blindly go after companies whose businesses are scalable, but ask the question, whether the business can earn high return on capital as well - preferably 20%+


  • The second, but more important question to understand is whether the high return on capital is sustainable or illusory – We look for presence of significant competitive advantages in a business like

    • Network effect

    • Switching costs

    • Low cost advantage

    • Brand and other intangible assets


  • The best way to avoid losing your capital in a company with a crooked management is to not invest in them in the first place

  • Promoter and Management due diligence is a very important aspect of our investment philosophy

  • The key question we ask here is if the management and the promoter of a company is trust worthy enough to partner with them in wealth creation

  • We avoid companies whose management have exhibited a record of poor capital allocation in the past like diversifying away from core business in the name of growth without paying due attention to profitability

  • Related party transactions like significant sales to a related party, purchase of raw materials from a related party, extending loans to group companies etc. are a strict no-no

  • We look for companies whose management treat minority shareholders fairly in the journey of wealth creation and avoid the ones who fill their own pockets at the expense of the public

  • Finally, we avoid companies whose managements have strong political affiliations, serious criminal records, history of unethical business conduct

  • No matter how good a business, it's growth potential and management, it can't command an infinite price

  • Example of wonderful companies like Infosys and HUL which gave almost zero percent return to their shareholders between 2000 and 2006 is a testament to that statement

  • That is where we get down to valuing a company and ensure that we don’t OVERPAY by comparing the market price with our conservative calculated fair value

  • We don’t blindly use simplistic approaches to valuation like P/E and P/B. For e.g. we check whether the “E” in P/E is sustainable, can the earnings grow substantially in the future , capital structure of the company etc.

  • We also emphasize on quality of earnings by comparing accrual earnings with cash earnings. This helps us to understand the true health of the business

  • Depending on the kind of business we are analyzing, We use different approaches to valuation including discounted cash flow, residual income model, expected returns method

  • We recommend compounding machines only when they are available at attractive valuations. Till then, we are happy to keep them in our watchlist and wait for Mr. Market to offer the right price