Bharat Shah has seen many multibagger stocks in his career as a stock picker. He has a common sense approach to the entire philosophy of investment. He advices investors to shut their eyes and ears to the global noise and quietly buy good quality businesses like HDFC Bank, Asian Paints and Bajaj Auto and then reap the benefits.
He points out that if investors want long term success in investment, they must cultivate a mental discipline to stick to quality, look for compounding and high-quality management, high-quality businesses, superior return on capital employed, predictable sustainable growth and reasonable valuations. He emphasized that if there is a quality franchise which is sustainable, if it gives superior return on capital employed in a consistent manner and if things are fair, then it will reflect in the price.
On the question of valuations, Bharat Shah suggests that investors should not be obsessed with buying only at “mouth-watering cheap valuations”. Looking at mouth-watering cheapness in investing is a flawed idea, he says, and explained that unless the markets were very depressed, or there was a special situation, investors would never get extremely cheap valuations.
He advises that investors have to hunt for “reasonable valuation” and explained that in the long term, things that add value have clearly worked. He says that the parameters that investots had to bear in mind were “High quality of business”, “consistently superior or outstandingly superior return on capital employed” and “growth”. He explained that while the return on capital employed provides a sail to a ship, the growth provides the wing to those sails. To move the ship ahead, both were required and if they were there in the stock, and the stock was bought at a reasonable price, the investor would have his multibagger.
Bharat Shah gives the classic example of Asian Paints to prove his point. Asian Paints has never been a “cheap” stock. Its valuations have always been expensive. But, Asian Paints, over a 10-year period or even longer had compounded at close to 32% and is a multibagger in every sense of the term. He cautioned that quality businesses would always become very expensive, but when a business enjoys very sustainable long-term, consistent franchise with decently predictable earnings, then in the eyes of the market for every rupee of earnings growth the ascribed value is more than proportionate.
Bharat Shah also has a bit of practical advice that to get good compounding in the long-term, the investor needed to invest in companies with “good” growth even if the growth rate was not “exceptional”. He says the best way to deal with high-quality businesses is to go back in the past, take one-year forward earnings and look at their valuation on that date. He says that the investor would invariably find the stock was available at a discouraging valuation, but if he stayed the course, then he would find that these stocks really create outstanding growth.