Investing Lessons from MOSL 23rd wealth creation study

MY LEARNINGS FROM

MOSL 23rd Wealth Creation Study

Based on the Video (See link at the end)

 

 





LESSON 1

Buy only when the RoE is greater than the cost of capital. MOSL Assumes cost of capital to be 13%

 

My notes :

• The cost of capital for most companies can be assumed to be 12 to 15% based on their credit rating.
• The cost of capital for NBFCs could be 8 to 10%
• The cost of capital for Banks could be 6 to 8%
• Check the latest investor presentation or annual report to get this data. But a 13% filter on ROE will help to weed out most of the companies and provide you with a list of companies that is worth spending more time on.
• Some sectors like Infra have a RoE of less than 10%. So the big question is whether it is even worth looking at these for investment portfolio.

 

 Lesson 2

Assuming the RoE test is passed and we have companies which we feel has a reasonable growth prospects (i.e. RoE > 13% or cost of capital) then it has the potential to create wealth provided we are paying a reasonable price for this share.

 

What is a reasonable price ?

 

• Reasonable Price Test based on the PE

1. A PE less than 10 is generally a great buy.
2. A PE between 10 to 20 is a good buy if we have a good grip on the future prospects and understand the company and industry well.
3. A PE above 20 requires aggressive assumptions regarding future growth and may only return debt kind of returns.
4. A PE above 25 is a very high price to pay. It may take decades to earn decent returns.

• Reasonable Price Test Based on Market PE (say Nifty PE)
•  Buying below the Market PE is safer than buying above the market PE. For example Sensex PE is 22 and buying a stock below 22 is safer than buying it above 22.

My Notes

 

• Very useful guidance and I have to really understand the game if the PE of the stock being purchased is above 20 PE.
• Any stock that I am buying above 20 PE means I am buying the story (or the narrative) and have a good chance of getting trapped.

LESSON 3

SELLING: is more difficult decision in Indian market. A bull run can take the stock far beyond realistic values. Sell Overheated stocks (very subjective assessment), sell when market has topped out (all stocks and more of a technical assessment of the market top) or sell when stocks hit certain exit valuation criteria.

 

My Notes

 

Selling is a more difficult decision. There is a fear of missing out when the price moves higher and fear of losing when the price moves lower. While Buying discipline is easier to practice selling discipline seems to be the harder part of managing a portfolio. Especially with your own money where there are no pressures or rules on how I manage it. It is easier for an FII or a MF to sell whenever their exit criteria triggers (for e.g. a rating downgrade or exclusion from an index could trigger a sell from FII and a redemption pressure could make a MF sell to meet the redemption requests). For an individual it is a lonely journey. Something which I have struggled with and see many people struggling whether to book loss or book profit or stay invested.

SUMMARY

My take away from the presentation is that we can buy stocks with following quantitative and qualitative filters

• ROE > 15%
• PE below 20
• PEG below 1
• Debt Equity of less than 1
• Reliable management
• Leader or Emerging Leader and
• a long runway for future growth (confident of at least 3 to 5 years growth prospects and visibility of at least 10 year growth for the industry)

This could change for financial companies  and banks where the filters will be quite different.

 

SELL :

Start using the technical stop losses on longer term charts say weekly or monthly charts once the PE goes above 40 for the stock.

 

SLIDE FROM THE VIDEO

 

 

LINK to VIDEO

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Disclaimer :

This blog is for educational and awareness purpose only. The views are intended for discussion and exchange of views rather than an expert opinion. This is not an recommendation to buy or sell or invest in the stock market and derivatives market. Kindly exercise caution and perform your own due diligence before investing in the market, after fully and clearly understanding the risks involved.