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   Raamdeo Agrawal, Director & co-founder, Motilal Oswal Financial Services, in a free wheeling conversation... Excerpts of the conversation: 

A long time back, I realised that ‘margin of safety’ is the cornerstone of wealth creation. Steeper the margin of safety, faster, larger and more consistent will be the wealth creation. Margin of safety affects size and speed of wealth creation. 

...my sense is that margin of safety emerges from your ability to forecast the company’s value five, seven, ten years into the future and compare it to what price you are paying today. 

Margin of safety is not on the table. It’s in the mind. When looking at margin of safety you are not just looking at the book value; you are also visualising the future expected value. This is both an art and a science. 

When you forecast a company’s value, you need to take into account the evolving business environment including monopolistic position, favourable regulatory environment, management’s ability to seize the opportunity and execute, etc. 

For example, Bharti Airtel, which has created huge wealth for its investors, just a few years ago was making losses and was available at a price which was almost half of its issue price. 

The very essence of a good business is a business with a sustained tailwind and an entry barrier. Both are essential as an entry barrier will keep competition away while the tailwind will make the business grow. 

Firstly, any management should realise a business opportunity – the nature of business and size of the opportunity. If there is no business opportunity, there is no scope of wealth creation. An extremely good management without business opportunity can do nothing. 

The dynamism of the management to exploit business opportunity is very important; like what Reliance is doing in E&P..

A favourable business environment in the hands of incompetent management leads to transient wealth creation. I call this the Barsati Mendak effect i.e. it’s only in the monsoons when even tadpoles make noise and are heard. 

Equities are an exponential asset class and one of the few avenues open to own a business. So we should control our greed and fear, buy for the long term and enjoy the process of wealth creation.

Entire interview here on ET