Portfolio Point: Do you believe in the idea of investing in ‘Perfect Company’?

We started Value Operations blog on 18th April last year and our vision to get that started was to share our knowledge and idea that we have evolve on how to invest successfully in stock market.

When we started our blog, Indian equity market was almost in the sixth month of declining phase. Investors were talking about value investment opportunities available in the market. My inbox was full of investment ideas for our fund from our clients.

I was sitting tight lip and was of view, that yes there are opportunities available but not many. I found three investment opportunities out of 1565 stocks trading on National Stock Exchange (NSE) at that time which were in my radar.

Bharti Shipyard was the hot topic at that time and its stock price was travelling down from around Rs 200 to Rs 140. Today it is trading at Rs 68! We are expecting its value after third quarter results in range of Rs 50 – 60 for March 2012 and at that time too we didn’t considered as investment grade.

Few months back VIP Industries was trading at Rs 80 and travelled as far as Rs 110 in less than 10 weeks. Almost 40% jump! But the stock price landed back to Rs 80. When it was trading at Rs 80, we said that it’s trading at its fair value to its March 12 earnings and there is no discount available. Many investors had different view and few of the investors also sent email and posted their views on our blog that it is going to cross very soon Rs 100, and it did happened!

My point to long term investors to think over here is, that if your horizon for investment is for the long term like our own fund or any other fund ( I am not thinking to retire another 40 years!) then running behind the momentum is foolishness.

In short run, the father of investment Benjamin Graham observed that market tends to be a bit like a popular election (made up of operators) and prices can bear no relationship to the underlying value of the business. Fads, fashions, so-called “new paradigm” or genuine innovations like the Facebook idea or internet can all produce prices that diverge frighteningly from the true value of the business.

In July 1999, Warren Buffett added: “weight counts eventually. But votes count in the short term… unfortunately, they have no literacy tests in terms of voting qualifications…”

There are more than 1800 opportunities available to invest with, but same time not all are worth to invest with on the National Stock Exchange today. Investors are always in look for perfect opportunity to park their money. But how do we know which company is the perfect one?

We advocate looking for these five attribute and doing thorough research and follow our quality ratings and intrinsic values:

1. Less or no debts on the balance sheet

2. Surplus Cash Flows

3. Extraordinary returns on equity with sustainable competitive advantage

4. Long term prospects of the business

5. Quality management

If you do not find any one of the above attribute missing in your favourite company then just ignore that opportunity, as you will come across many more opportunities in the future to invest with.

One Fund Manager shared with me the points of Perfection which he looks for before investment:

1. The company’s Balance sheet should have Net cash rather than Net Debt.

2. The company should show profit growth in all economic conditions.

3. The business should be experiencing fast growth.

4. The business should be unique in nature and very hard to be copied.

5. The business should grow without buying other businesses.

6. The business does not exist because of government regulations.

7. Poor management is not desirable

8. The business has many customers.

9. The share registry is free of institutional shareholders.

10. The financials should be as easy to read as children’s book.

What points of perfection you look for in any business before investing? Share with us if possible with the name of the company.