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.
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!