Paying more for quality

Hi Rohit,I am a bit lost on your statement:”re-rating of the PE” where is the baseline “rating” for PE coming from?What I got from your post is it's not only “value” but sometime you also buy stocks based on its “momentum” — that is, its forward earning outlook (what you state by saying growing intrinsic value)There is a timely article on SeekingAlpha (sorry, can not locate that article anymore) that talks about the standard followed around this is that PE should be double of growth rate at fair-value. So in this case if the earnings growth rate is more than 9-12 times then the stock is cheaper than fair value.This, though, does not guarantee anything that the stock will certainly go up as the article shows how cheap Apple is at current price. PradeepPS: I also noticed that a while back you were writing articles on SA. Kudos on that!

Very relevant post Rohit..This has always been a confusing thot process..our natural inclination towards cheapness (which is again relative) keeps us away from certain stocks..i personally think one shud do watevr one is comfy wid..but have a firm structure in place to avoid confusion and indecisive buying/selling actions..cheers!Neeraj

I have been a “quality” investor for a while now and here are my experiences:1.If you own a concentrated portfolio of less than say 6-8 stocks,owning a quality company – one with a strong business model having stable margins and which is relatively insulated from external factors like input prices etc – becomes very important.Why? Because when each company is 15% of your portfolio you don't want to make big mistakes that often come with owning cyclical and hence cheap(low PE) businesses.2.Quality companies often fall much less than mediocre companies. So a 30 PE quality company might go to 20 PE in a crash but a 10 PE company very easily goes to a sub 5 PE. There is much lesser volatility and hence much lesser probability of your over-reacting and selling at the worst possible time.Go back to 2008 and check.3. Quality companies bounce back on the first sign of recovery.Go back to 2008 and check.4. While buying a quality company like Nestle at 40 PE might seem outrageous – and it might not out-perform your 10 PE cyclical in the next 2 years, if you hold Nestle for 20 years it will make you enough money that you'll be surprised.In other words good companies compound money and compounding while seems ordinary in the short term, does magic over longer periods.Ask people who bought Nestle,Hero Honda 20 years back.This time is not different with such companies.5.You should be careful enough not to pay obscene amounts for anything – but that doesnt mean you'll wait for Nestle to trade at 10-15 PE. That might never happen and you'll have only Benjamin Graham's Security Analysis (with all due respect) while others who invested at Nestle when it came down to 25-30 times go abroad to see Phil Fisher's holiday home. PS: Nestle is just an example.Substitute with a suitable company.

Thoughts very well put down – Both Rohit and Kudva.In search of multibagger stocks and small and mid cap stocks I have always ignored the Large Cap/Quality stocks.Will certainly look at the Quality stocks from now on as valid logics have been provided for investing in these stocks.

Hi pradeepthere is nothing as a baseline PE ..what typically happens is that as the returns profile – ROE etc and growth improves the market recognizes it and increases the PE. in some case the improvement is permanent and hence the PE remains at a higher level ..in some cases it is temporary, in those cases the PE corrects in time.On momentum – i am looking at business momentum and not stock price momentum. difference between them is day and night. I am looking at a business which will do better than what the market expects ..thts the key to high returns. whether i am successful or not is another issue …but thats the objectivergdsrohit

Hi philipam i reading it right ..company has mcap of 70 Cr with debt of 1800 Cr ? if that is the case, then the stock is more like an out of the money option. if i works you will make a lot of money otherwise it could go to zero. but honestly i have not read about the company and would personally avoid something with such high debtrgdsrohit

Hi navjotthen you are a rich and smart guy ..good for yourgdsrohit

tnks for the prompt reply rohit philip

This is in response to the following post of yours: http://valueinvestorindia.blogspot.com/2006/03/warren-buffett-of-india.htmlI have my disagreements about the conclusion this post posits: that a high capex does not mean a growing company. In my opinion, it is just the opposite. Would we call a company that reinvests its gains in expansion of capacity (capex) a growing one (I would) or should we alternately think that a company that either sits on its cash or distributes it as dividend is seriously trying to grow?

Kudva has some fair points in this quality vs cheap debate. However, my 2 bits:- By the same toke, one can argue that it is even more difficult for a retail investor to select cos and hold them for, like, 20 years. Most probably, at the bottom of the market, he would have sold it only to see it come back. In other words, index funds might be even better. And thats why I have seen many ppl who have done better in Real Estate/PPF because of the passive nature of investments.- Survivorship bias can't be ignored. As I mentioned above, most ppl would have sold out. Only the few anecdotes about those who had stocks for 30 years come to the fore. Also, look at the high quality companies, tha is, Sensex in 1990 vs now. How do you determine good quality stocks ?HLL is an extremely high quality stock but what about the returns? Infosys, See pre-2000 and post 2000 10-year returns, In fact the entire IT sector, if done BUY&HOLD, will give sub-par returns.- Most of the ppl who track must be aware in depth about Warren Buffett. However, many people do not know, in detail, about the earlier pure-value WB vs now. He crushed the markets earlier with small sums of money. Later he moved to his qualitiative stance upon handling large amounts of money. With small sums (large enough for 99% of the world), his earlier style works better though it is crazily tough.- and the Security Analysis barb was not too appropriate. Templeton had a nice beach house as well and there are enough Graham followers who are quite well off as well.