Mohnish Pabrai, the whiz-kid investor who delights in calling himself a “shameless cloner”, once lamented that despite Warren Buffett’s investment technique being so well documented, few investors bothered to clone him. Mohnish did that cloning and became a successful investor and billionaire in his own right.
However, no one has attempted to apply Warren Buffett’s technique to Indian stocks so far.
Ashutosh Shyam of ET Bureau is the first to attempt this revolutionary exercise.
Ashutosh points out that Warren Buffett has a “basic screen test” which forms the cornerstone of his investment philosophy. The said “basic screen test” has three rules which a stock has to pass through before it can be considered as being investment-worthy.
The three rules of Warren Buffett are:
(1) The company must have positive earnings growth for the past seven years. This shows that the business is one where future earnings can be foreseen with some certainty.
(2) The average earnings growth of the past three years should be higher than the average growth of the past seven years. This enables the comparison of the medium term growth rate to the long term growth rate and look for an expanding bottom line.
(3) The return on equity should be higher than the industry average, preferably above 15%.
If a stock fulfills the three parameters, Warren Buffett projects the possible future earnings and the possible dividend payout from historical data on earnings per share (EPS) and dividend declared. He finally gives the green signal to the stock if the projected return to an investor is at least 15% every year.
(Image Credit: ET)
Ashutosh Shyam points out, in a tone of amazement, that Warren Buffett’s rules for picking winning stocks are so stringent that only 13 stocks (out of the universe of 6,000 listed stocks) qualify for consideration.
These 13 lucky stocks are Atul, Dabur India, Lupin, Torrent Pharma, Wipro, Navneet Education, Kitex Garments, Natco Pharma, Marico, Ajanta Pharma, TCS and Kaveri Seed Co.
Ashutosh explains that each of the said 13 companies grew on an average of 27.40% annually and their average growth in the past three financial years has been 35% against 27% in the past seven years. He adds that the average RoE of the 13 companies was 33%, of which RoE of eight companies were higher than 30%.
We have to compliment Ashutosh Shyam for his diligent research. Each of the thirteen stocks is a powerhouse with proven multibagger credentials and will bring a lot of joy to the investors who choose to take them home!
Nice work got so much thanks very much
Sorry to say this out of those buffett would have steered clear of pharma companies… as they weren’t available at throw away valuations and also he generally doesn’t invest in them
I dont think Buffett ever used a mechanical approach. His most successful investments seem to be well-known consumer/franchise companies which either temporarily got into trouble or corrected due to market declines, so that valuations were reasonable, after extrapolating earnings growth in the long-term (10+years). He bought companies where he had confidence in management and where he was reasonably confident that the company will not go bankrupt.
He then relentlessly averaged down, even if stock prices declined 50% from his original buys, and then held them ‘forever’ after they rebounded.
He has no pharma stocks in his portfolio & his only technology stock (IBM) has been a major disappointment and he has been averaging down on it for years now.
One big rule of warren buffet is missed out here, and is applicable to many of the 13 stocks,…i.e. the stock should be undervalued or at least fairly valued …
That way, Gillete,Colgate,eicher,jubulant food, should also make to the list, but why they are not…only as they are very highly expensives…
OK nice work but dear Arjun the above list contains only 12 not 13
Good write up,BUT NOT OF MUCH USE ! BUFFET’S thoughts are universally known . These types of stocks get recognized soon- as positivety get priced in soon- , hence very difficult to find in the normal course requiring very patient wait.
Nice article 🙂 , also check: http://vikrammg.com/2015/09/04/warren-buffetts-investing-checklist/ warren buffet Investment Checklist.
It is very difficult to find good Secular growth stories and still undervalued .For that we may have to wait for big correction like 2008.If we can not wait and don’t have confidence to buy during panic we should slowly accumulate good qualty stocks slowly. I doubt Warren Buffet had bought the full list.He might have invested in HUL,ITC,Asian paint,Colgate,HDFC bank,Kotak Bank,TCS,Infosys, Maruti,MRF,L&T,Sun Pharma ,Lupin,United Spirits, MCX ,Bajaj Auto ,BEL etc type stocks at deep corrections which have been Secular stocks since long.
Good article. But I believe WB always consider one thing that is value.
All these stocks other than Marico are down in value simce the article was published .. what is the holding time for these stocks ?