As you begin your investment journey, there are a few foundational principles that can guide you toward selecting high-quality companies and staying committed for the long term.
1. Start With Margins – Look for Strength in the Core Business
The gross profit margin is one of the first indicators of business quality.
Aim for companies that consistently maintain 20% or higher.
- A healthy margin often points to:
- A durable competitive advantage (moat)
- Better pricing power
- Operational efficiency
2. Track EPS Along With Revenue and Profits
While revenue and net profit growth are essential, ensure that the Earnings Per Share (EPS) is growing proportionately.
Stable EPS growth indicates:
- Efficient capital allocation
- Controlled dilution
- Strong underlying business economics
3. Evaluate Debt With Caution
A company’s balance sheet should reflect manageable and sustainable debt levels.
If debt is present:
- Calculate the interest coverage ratio
- Ensure the company can comfortably meet its interest obligations
- Confirm that earnings would withstand tough economic phases
Debt should support growth, not create vulnerability.
4. Focus on Return on Equity (ROE)
A consistently strong ROE (20–25% or higher) signals efficient use of shareholder funds.
However, ensure that:
- A high ROE is not inflated by excessive leverage
- Profits come from operational strength, not borrowed money
Quality companies generate high ROE without stretching their balance sheet.
5. Prefer Focused Businesses Over Conglomerates
Companies that excel in one or two well-defined product lines often outperform diversified companies.
Reasons include:
- Clear strategy
- Strong brand identity
- Deeper expertise in their niche
Many multibaggers historically have come from focused, specialized businesses.
6. Be Realistic and Patient With Returns
Market returns rarely come in a straight line.
Expect periods of:
- Flat performance
- Small gains
- Even negative returns
Long-term investing requires:
- Patience
- Discipline
- Staying invested despite volatility
Consistent investing and holding quality companies is the most effective antidote to volatility.
7. Recommended Reading for Serious Investors
Two excellent books to strengthen your understanding:
1. The Little Book on Valuation — Aswath Damodaran
A clear guide to valuing companies using practical and widely-used techniques.
2. The Little Book That Builds Wealth — Pat Dorsey
Focused on identifying business moats and long-term competitive advantages.
Both books provide solid grounding in fundamental analysis and investment thinking.
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