How To Invest...With Raamdeo Agrawal: The Power Of Quality
Market veteran Raamdeo Agrawal shares his investment philosophy with BQ and its viewers.
In a wide ranging interaction with BloombergQuint’s Niraj Shah and investors tuning in from across the world, market expert and veteran investor Raamdeo Agrawal answered queries on his investment philosophy and how he picks winning companies.
Also Read: Raamdeo Agrawal’s Journey From A CA Student To Stock Market Expert
As chairman of Motilal Oswal Asset Management Company Ltd. Agrawal has created the “QGLP” - Quality Growth Longevity and favorable Price - investment process and its ‘Buy Right, Sit Tight’ investing philosophy.
On the third episode of the series, Agrawal talks about the power of quality in investing.
You can watch the interview here:
Here’s the edited transcript of the interaction:
Sumeet Sawant: How can you measure quality? Which parameters are qualitative and which are quantitative?
I believe that quality is something that matters and not quantity. Quality comes when the company is run by a good management. Quality companies will always look expensive. One must look at return on capital employed and return on equity. The next parameter that one must look at is the cash flow.
Abhinav Kumar: In QGLP, why is ‘Quality’ the first parameter and how much weight does it carry in QGLP?
In QGLP, everything is sequential. Quality of business comes first and then the quality of management. Then comes growth and longevity of growth and then we must look at the price. One of the biggest advantage in the market is that 99 percent of the market is chasing prices. 1 percent is chasing value.
You do not have competitive advantage while chasing price. But by chasing value, you have one big difference, because value is not written anywhere, it is estimated.
Quality is never an accident, it is always the result of intelligent effort. Companies do not became great by accident.
Harsh Joshi: Quality is a subjective term. So how do you decide what is a quality stock? How does one decide to stick with it?
One of the best things about investment is do what you understand. For instance, you cannot look at the technology sector with a 10-15 year view.
Ankit Shah: How do you measure quality of a company? By its financial strength? Or return and capital ratios? Or competitive strength?
Usually, it is a mixture of all. Still, firstly, the narratives and the numbers much match.
Anuj Upadhyay: Does effectiveness of the management team play an important role, even if the company fundamentals are strong enough?
The management is measured in three different parameters. One of them is competence and integrity plays a major role in competence.
Kunal Sukhani: Do you prefer independent board run companies or promoter-driven companies? Does it make a difference from a quality standpoint? Do you think these independent board driven companies get premium?
I prefer a company which is making money, without using lots of money. Several parameters must be checked in this case. For instance, if a company is a promoter company, how ethical is the promoter? What is the next succession plan? One must be aware of all this.
Indi Banna: What quality stocks are left with fair value after 2014 rally?
Its all about one’s understanding. Margin of safety is in quality, growth and price. People are looking for cheaply-priced, high-quality companies. You need the competence and skill to pick the stock and build your portfolio. When the stock price comes down, don’t look at the price, look at the value.
When the stock price comes down, don’t look at the price, look at the value.
There will be lot of turnarounds as the global economy and Indian economy recovers. Stocks which are looking very good right now will get accelerated because management still has capability to scale up business and grow faster.
Sandeep Menon: A good business with an average promoter or a good promoter with an average business. What’s your preference?
A good business with an average promoter. Because, a good business is non-negotiable.
In the first episode of the series, Agrawal talked about the “power of focus investing” where he explained that irrespective of the price, the game is to find value. The second episode was on the power of compounding, which Agrawal also referred to as “the eighth wonder of the world”.