After reading various companies which have witnessed 100x returns in the past, what has intrigued me is the fact as to how can i identify such companies at an early stage? What do i need to look at to understand that a particular company will make it big in the next decade or so. Multibaggers have always fascinated us but we all love the next multibagger, not the current one. What has not helped my case is the fact that almost none of these companies pass the traditional tools that people preach on investing. Factors like huge free cash generation, good return on capital employed (ROCE), operating profits are something which have alluded these firms at initial stages. The traditional investment tools rarely help in identifying such firms at an early stage. Quantitative analysis is difficult and that is why investing is an art and not science. Why would we buy a firm which has a negative net worth, has had operational losses and has no timeline on when it will be turning up a profit. However, many of the current stalwarts once were in these courts. Think of Rallis India in 2002, Symphony in 2003, IndoCount in 1999 and many more. Yes, today they are brilliant companies, attracting huge investor interest, but long ago almost went under. It would have required great foresight to identify the future for these companies and even after that holding onto such companies through those years. Salute the people who were able to do it.
In my pursuit of holy grail, of trying to find what it will take for me to have the visionary power to understand such companies in infancy which eventually might lead to windfall returns i have read numerous business history, tried to understand how to apply ratios, delve deep into the psychology of the management, went through extensive interviews of past successful managers and even those who failed and a lot more. More or less it has been an ever continuing journey to find what really can help me in getting a successful investment process at the back of my head.
The result of all the reading up to now has made me understand one thing. I don’t yet know what is the most important factor successful investors look for in a company. They vary from investor to investor. What is comfortable for one could be difficult for another. The things that i have found the most important until now has been studying the size of opportunity and management focus. Those two in my mind are the most important factors i look at when investing in a company. What my experience tells me is that these two factors, if in favor for a company could make or break a company. A huge available and growing market for the products in which the company operates gives the company an opportunity to succeed in the long run and helps it in maintaining high growth rates on a consistent basis. It gives the benefits of scale and the chance of success better than other companies. However, what use is opportunity if intent is not present. This is where management comes in. If the company is run by a professional who is passionate about success, it invariably will be a successful initiative. History has demonstrated this and so these are two factors which i give a very good thought to while scouting for investments.On the face of it these are two factors which provides a strong starting point to an investor. After this there are many other factors which would either make or break a company but those will be discussed in other posts.