In the late ’80s dawned the realisation that EPS growth is an important part of the equation. Thus came the framework of PEG i.e. P/E to Growth in EPS. The lower the PEG of a stock, the more attractive it is. Some institutional investors called it GARP or Growth At a Reasonable Price.
Then in the ’90s, I was exposed to the thinking of Warren Buffett. He emphasised the role of quality in investing with (now common) metrics like RoE (Return on Equity). He has famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Some in the market began to call this style of investing QGARP or Quality Growth At Reasonable Price.
In QGARP, the focus was mainly on the business quality. I deciphered that quality of management is equally important, if not more. Also important is the longevity of both, quality and earnings growth. Thus, around 2010, I came up with my own investment philosophy QGLP – Quality, Growth, and Longevity at a reasonable Price.
Currently, the Indian stock market is practising QGLP or its variants. So, how does one gain a cutting edge in this situation?
I see two ways: 1) Use patience for the power of compounding to fully play out, and 2) Use investment frameworks (IFs). To reap the full benefits of any investment philosophy, it must be overlaid with several time-tested IFs. Over time, I have developed an array of IFs, under each of Q, G, L and P.
For instance, to ascertain the Quality of Business, one of the best frameworks is Porter’s Five Forces. I have even developed a scoring model which tells me which business is attractive and which is not.For Quality of Management, I use the framework of Integrity, Competence & Growth Mindset. A more recent framework is what I call Founders i.e. promoter-run companies tend to offer superior returns compared to professionally run companies.
Under G (growth in earnings), my pet frameworks are Value Migration and NTD (Next Trillion Dollar Opportunity in India). Value Migration means that value (profits and market cap) will migrate from outmoded business models to those which better serve changing customer preferences. For instance, in telecom, value has completely migrated from wired telephony to wireless. Likewise, in IT, value continues to migrate from high-cost developed countries to emerging countries like India.
NTD is a totally proprietary framework. In essence, it took India around 60 years post-independence to generate its first trillion dollars of GDP. Every next trillion dollars is coming in shorter and shorter periods of time. When GDP and per capita income rise, people’s basic spending doesn’t rise in the same proportion, leading to exponential growth in discretionary spending.
Then, there are frameworks like Mid-to-Mega and 100x. Mid-to-Mega is how midcaps can turn into large-caps over 5-10 years, delivering handsome returns in the process Likewise, 100x is how small caps can become 100 times their current value in 10-15 years, implying outsized returns.
Investors who are able to identify such investment frameworks should be able to beat the market. For small investors, this is a challenge. They would be better off allowing professional fund managers to handle their money.
(The writer is Chairman and Co-founder of Motilal Oswal Financial Services)