In the year 2000, the market had crashed big time. Later in 2008 again the market crashed and recently in 2020 again we faced a market crash. No matter how big the market crash is be it in 2000, 2008, or 2020, we still got up and brushed every morning. So be it a tooth-brush, hair oil or detergent, etc. all these are clubbed under the category of FMCG (Fast Moving Consumer Goods). And, the business of the companies part of this FMCG category has always been in boom be it when the market is bullish or bearish. Such businesses carry too much value. The legendary investor Peter Lynch mentions that such businesses are always around us. If the common man finds and invests systematically in such businesses then one can earn uncommon profits from that investment.
There are numerous such companies and business models, so how do we find the best out of them? When we buy food grains from the market then too we have to get pebbles out of it. When the age is of adulteration, mostly pebbles are found in it, we have to find the grain from it. If you wish to earn good returns by investing systematically for the long-term then how to find the best company out of so many of them? Let us find out.
If you wish to earn good returns by investing systematically for the long-term then you can opt to invest in the shares of the company which passes these five tests. So the first test out of these five tests is that the product should be a basic need. The second test is that the demand for the company’s product should remain consistent irrespective of the boom or slowdown prevailing in the economy. That means customers should often make re-purchases of their products. The third test is the company which we have shortlisted should have a better market share in that product category i.e. it should be a market leader in that category. The fourth test is that the company’s product should be affordable; which means people from any section of society should be able to purchase it. The fifth test is that the company’s product’s need should remain unaffected despite any technological advancements going on in the world.
Let’s take a simple example. So which is that company which is passing all these tests? Also, history is proof that if one invests systematically for the long-term in the shares of such a company then one can earn good returns there. Let us understand this step by step. The first test is that the product should be a basic need. Eating/drinking is a basic need. So be it morning breakfast or evening snack, most of us like to savor tea along with biscuits. So having biscuits with tea has been a basic need in many households. Most of you must’ve found out which company we are talking about. We are talking about Britannia. The third test is the company should be one of the market leaders in that category. So if we talk about the biscuit industry then Britannia is one of the market leaders in its segment. We now have understood the first as well as the third test. Now let us try to understand the second test. The second test is that the demand for the company’s product should remain forever. Be it boom or slowdown, the re-purchases should still be consistent.
During the lockdown even when we were facing a tough time, even then most of us continued consuming biscuits. That means the business of biscuit was still running smoothly. The fourth test is that the company’s product should be affordable. Biscuits are easily available as well as affordable too. The fifth test is that the company’s product’s need should remain unaffected despite any technological advancements going on in the world. If we talk of the past then 20 years ago, the STD booth was highly in demand while if we compare that time to today’s time, we find that today majority of us carry our phones. Due to technological disruption, the STD booth has become a thing of the past. Talking about biscuits, people used to consume biscuits 20 years ago too and they consume them today as well. The business of the company manufacturing biscuits was in demand 20 years ago and is still in demand and will hopefully be in demand in the future as well.
Now, the companies that are passing all these five tests may still have to face huge competition. So out of those companies, we are supposed to find one such company that is like a castle outside which there’s a trend filled with water housing a crocodile in it. That means the company has created such a sustainable competitive advantage due to which its competitors are facing a tough time.
How to find out which is that company amongst these which has built certain sustainable competitive advantage? We can find this out by analyzing its return on invested capital figures. The company’s return on invested capital or return on capital employed should be more than the company’s cost of capital. We have already uploaded a detailed blog on this topic. Do check it out. You can check the figures of the company’s return on invested capital or return on capital employed on the website of Money Control.
So the companies that pass these five tests need to have a simple and easy-to-understand business model. If we analyze the business model of Britannia, it is very simple, if the company is manufacturing and selling more units this year compared to the number of units sold in the previous year, then it is growing.
In this manner, if we invest systematically for the long-term in the companies that pass these five tests, have a sustainable competitive advantage, also are low-debt companies as well as there is growth in their top-line and bottom-line then history is proof that we can earn good returns here.
What if there comes a quick fall after investing? Hence, we are supposed to invest systematically. Invest less when the market valuation is expensive and invest more when the market valuation is least expensive. While investing diversification plays an important role. Hedge Fund Legend Ray Dalio quotes, “If you don’t own gold, you know neither history nor gold.” Hence, you should invest systematically in gold along with investing in these companies.
In this way, if you wish to invest systematically in the share market and gold, then we have a special service for you known as Wealth Compounding Machine. If you wish to, you can subscribe to it. Wealth Compounding Machine includes an educational presentation wherein it guides you as to how your portfolio should ideally be in the long run and it is updated regularly for 5 years from the date of subscription.
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We may or may not have our investment in the companies discussed here. We would like to give a disclaimer here that all the advice given in this blog is for educational purposes. This is not any kind of buy/sell recommendation. Mr. Bhuushan Godbole, his company as well as the director board of the company has crores of investment in the share market as well as in gold and silver. This is our disclaimer/disclosure. So we’d like to mention this again that invest in the market after thorough analysis and also after discussing it with your financial advisor.
Until next time…
Happy Trading, Happy Investing!!!
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