There are few things more pleasurable than gazing at the list of the fastest and most consistent wealth creation stocks. These stocks have made their investors multi-millions. The best thing is that the drivers that caused these stocks to become powerhouses are still in place. So it may not be too late to dip your toes into these stocks even now.
|Wealth Created (INR b)
|5-Year Price CAGR (%)
|2004-13 CAGR (%)
|Kotak Mahindra Bank
|O N G C
|H D F C
|M & M
|H D F C
If you study the Motilal Oswal Wealth Creation Reports over the past several years, the one thing that you will notice is that the same stocks have repeatedly made it to the list of the fastest and the most consistent wealth creators.
For instance, Asian Paints, the paints behemoth, has firmly held its place at the peak of the list for the past several years with a CAGR of 30% +. Similarly, blue chips like ITC, TCS, Nestle etc are a perpetual part of such lists with a high CAGR.
What this means is that if you had bought these stocks, even when they were at the peak, you would still have made a lot of money.
The philosophy that you are better off buying powerhouse stocks that are growing at a high CAGR (of 18% +), even if you paid a high initial price for them, instead of buying doghouse stocks at a low price, was first advocated by Charlie Munger. His immortal words were:
“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
Charlie Munger’s philosophy has been followed by a number of savvy stock pickers who have made a fortune. Bharat Shah of ASK Investment very bluntly told investors “Forget Cheap Stocks. Just Buy Quality Stocks”. Bharat Shah pointed out that stocks like HDFC Bank, Asian Paints, Sun Pharma are seemingly immune to market cycles and are able to weather the storms. Such stocks have great competitive strength and the capability to grow their earnings between 15% to 20% consistently. This predictability of earnings creates great wealth in the long-term Bharat Shah explained.
Another believer in Charlie Munger’s philiosophy is Prof. Sanjay Bakshi who conducted an in-depth study on the subject (Why You Should Always Buy Top Quality Stocks (Even At High PE) & Not Low Quality Stocks and Don’t Be Afraid Of High PE “Expensive” Stocks) and concluded that if you bought powerhouse stocks, even at insanely high PEs and held on to them tight for several years, you came out a winner. In contrast, if you bought a doghouse stock, even at dirt-cheap valuations, you were doomed.
Yet another successful follower of the dictum that you are better off buying quality businesses even at high prices is Basant Maheshwari of theequitydesk.com and Basant Top 10. His favourite stocks are Page Industries, Hawkins Cookers, Titan Industries and Gruh Finance, each of which is a powerhouse in its own right, growing at a scorching pace. The fact that each of these stocks is quoting at a stratospheric PE does not worry Basant Maheshwari one bit, so long as the growth rate of the underlying business continues unabated.
My personal portfolio also testifies to the fact that the biggest profits are made out of the powerhouse stocks like HDFC Bank, Tata Motors, Sun Pharma, Amara Raja, Supreme Industries, Page Industries etc.
Whenever I have bought an untested stock in the hopes of getting a quick multibagger, I have lost money.
So, why bother with the “cheap” stocks when the riches are there for the picking in the powerhouse stocks?