Lord Krishna says in the Gita, that one must do the right action and not worry about the result. When it comes to stocks, ensure you have the right picking strategy. Success will eventually follow. The stock market is characterised by lumpy returns which means that growth happens in bursts and is often interrupted by market corrections. But over a 3 to 5 year horizon the market gives a higher return than other asset classes.
Here is how I pick stocks. I follow an investment strategy called Roots & Wings.
ROOTS
A strongly rooted plant can not only grow and become a huge tree, but also withstand any storm. My investment philosophy aims to capture this principle to preserve wealth.
- I prefer to invest in businesses that carry very low debt. This means that their growth is fuelled by their customers and through internal accruals.
- I like companies that consistently reward their shareholders measured by high levels of Return on Equity and Return on Capital Employed.
- Companies where the promoters possess sound operating knowledge and hold a significant stake, are my favourites.
WINGS
A bird that grows strong wings can fly higher and travel long distances, and overcome turbulence in its journey. Likewise, my investment philosophy aims to increase prosperity by:
- identifying companies with growing sales and earnings.
- I like companies that have a huge runway of growth ahead of them. Usually, they tend to grow 1.5 to 3 x times that of the GDP growth.
- I prefer companies that generate significant operating cash flows. This also indicates that their growth is real.
- I love companies where this real growth is protected by a strong pricing power in their markets.
The selection of the investment portfolio is guided by the “Roots & Wings” investment philosophy and is “powered by Machines”. It is neither highly concentrated nor over diversified. I mitigate equity risk by suitable diversification across sectors and stocks. At the same time, I reduce excessive diversification by limiting the number of stocks to about twenty (not more than thirty).
Once carefully selected, I follow up with rigorous monitoring and creative churn. Roots & Wings is rinse-repeated; assumptions made while selecting them in the first place, are validated. Stocks that don’t make the cut are clinically removed without emotion. The allocation of each instrument is carefully re-calibrated dynamically using an algorithm, to keep portfolio growth steady.
This strategy has given a “successful” result but only because the process has been tested using 20 years of data; and live since 2019.
