A) I never hold any large caps. In fact I sold out Bharti once it hit Rs 120 (Market cap Rs 20,000 crores) after getting in at Rs 25 (Market cap Rs 4000 crores) because it was approaching a market cap I was not comfortable with. That eliminates all the established blue chip from my portfolio. I am constantly in search for emerging blue chips and not the established ones. That is why I invest in small/midcap companies. I believe that you can get the next Infosys in a small cap only.

B) I hold at most between 3 and 5 companies in my portfolio. Yes only 3 to 5. Once I finish analyzing a company I ask myself one question “Is the company good enough to take 20% of my portfolio. When ever I get an answer as yes the next question is OK what can I replace it with. If I get another yes I would buy that stock. I prefer putting all my money into one company but just for the event risk I have divided it into 3 to 5.

It takes me hardly one hour to analyze a company but making up my mind (the second part of B above) takes a few days or a even a few weeks at times. This is so because I believe in concentration.

C) This is how I like to zero down on a company.

1)      I look at the management first. The management is the most important and lest talked about aspect of a company.

2)      I like to know what business the company is into and then look at whether it is scalable. I prefer new sectors since the growth is highest there. I avoid cyclical because I cannot predict the peaks and troughs.

3)      I then look at the market cap. If it is below Rs 1000 crores I think we could pay a higher PE to that company

4)      I would then look at the RoE to see if the company is using its capital efficiently. RoCE is a better concept though because you could hike the RoE by using debt but not the RoCE

5)      I would then compare the PE with the growth and the RoE. If there is a big difference between RoE and growth then the company does not merit investments. This is so because for a company to grow at higher rates of growth compared to its RoE it would have to dilute capital. That hurts

6)      Dividend, book value is something that I look but do not base any of my decisions upon. I think that they tell you what the company has done and not what it will do.

D) Once a stock is bought and the price falls without any change in fundamentals and if I have the required cash I will buy at each fall.

Now I do not stop at step 1 of phase C above. I do look at steps 2,3,4 and 5 of phase C above but there is a difference in priority. That is all. For instance I like Financial technology. MCX could be HUGE but I am worried by valuations so each time I want to buy the stock I think in terms of phase B above and give it a pass.

 So it is just a matter of prioritizing the tools of analysis. No analysis is complete without putting all tools at work. In none of my reports will you find the valuation parameter missing because irrespective of the strategy you use the final objective is to make the stock price a slave of its earning. The question is which one are you more comfortable using when compared to the others i.e. prioritizing the tools.