The 12-15-20 investment formula can make you a millionaire!

The last one and a half years have been nothing less than eventful, and an extreme level of volatility is the new normal now. Looking at other countries that are struggling with the third and fourth waves of Covid-19, India is still barely coping with the second wave. In the midst of uncertainty and economic turbulence, it becomes extremely important to assess one’s individual equity portfolio, from a risk-reward perspective.

We suggest one should look out for four important traits while assessing one’s equity portfolio:

Company which benefits from formalisation of economy

The formalisation of the economy has gained pace in this Covid-19 crisis, and subsequently companies with high leadership positions are garnering increased market share and revenues, at the cost of weak unorganised players. Companies with robust leadership positions are becoming bigger. This trend is expected to continue. Companies with strong brand equity, better distribution and reach, will continue to gain positively out of formalisation and will report better operational performances.  Look for companies that have high pricing power and strong leadership positions.

Businesses with high earnings growth

The market has rewarded companies that have done remarkably well on earnings. High earnings and sustainable cash flow generation are the key things an investor should focus on. One should look out for companies that have shown earnings recovery or where the trajectory looks promising. Market prices are a slave to earnings and that’s the most important ingredient for equity wealth creation.

Companies with a strong balance sheet

A crisis like Covid-19 separates the wheat from the chaff. Weak balance sheets succumb to this kind of unseen economic turbulence. Always stay away from high leveraged balance sheets or where the accounting doesn’t give much-needed comfort. One should always invest in good and clean companies, with a strong capital allocation track record, which helps it generate high ROE/ROCE. Normally, look out for businesses that generate good cash flows, high ROE, low leverage, good asset turns and have the internal ability to sustain capex.

Management pedigree

Management or promoter makes all the difference. Look out for scalable businesses, which are run by people of high competence and an unparalleled level of integrity. Never forget, it’s the right management that creates wealth rather than the right business. One should focus more on assessing the right management. Look out for the history of the management or promoter, their past actions, their business acumen and performance, and how their competitors and market participants perceive them.

All in all, there can’t be a shortcut to identifying the right equity investments, but one should aspire to own a scalable business with strong pricing powers, businesses that are run by competent managers and which report their financials in the right manner.

(The writer is fund manager at Ambit Asset Management. Views expressed are personal)