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Jesus answered, “I am the way and the truth and the life. No one comes to the Father except through me.

6 Jun 2019


The question however is, what are the criteria you should be using to find great stocks for long term investment? There are five major criteria that you must look at while looking for stocks for long term investment, these are:
High Sales Growth (shows how fast company is growing)
High Net Profit (shows if company is generating sufficient profits)
High Return on Equity and Capital Employed (Shows if company is stylizing its invested capital efficiently to generate more profits)
Low debt (shows how much debt the company has on its books, too much debt can ruin a great business)
Low Market Capitalization (smaller companies have better potential to grow)
Low Valuation (No matter how good a company is, it’s not a good investment if you pay too much for it.)

                         Based on the above mentioned criteria, A famous Analyst has created a basic search query to find stocks that have been growing well in the past. The query is as follows:
·         5-year sales growth > 10%
·         5-year profit growth> 10%
·         Average return on equity over 5 years > 20%
·         Average return on capital employed over 5 years > 20%
·         Debt to equity < 0.5x
·         Market Capitalization > Rs 1000 crores
·         Price to Earning < 25x
The query above will give you a list of stock that have been performing well for the past 5 years on various criteria.  
Therefore Quick Summary is:
·         Create a list of good stocks that have performed well in the past, have low debt, continuously generated high return on invested capital and are selling at decent valuations.
·         Invest within your circle of competence, know your limits and stay within those limits, it does not matter how big or small your circle of competence is, all you need is a handful of good stocks. For the start, look around your house and find the companies that you interact with on a daily basis.   
·         Look for stable businesses, that have been consistent performers for the past 7-10 years, do not confuse speed of growth with great performance, it is the consistency of growth that matters, not rate of growth.
·         Next, look for sustainable economic moats, characteristics that keep a business safe from being taken over by competitors (such as brand name, monopoly, patents, high entry barrier, strong distribution network), and high return in invested capital, which shows that company’s management is prudent in terms of capital allocation.
·         Finally, find out if the stock is trading at a reasonable price. Great businesses usually trade at a slight premium, however, it is still important to avoid overpaying, you can use valuation methods like P/E Ratio, and Discounted Cash Flow method to ascertain value of a stock.       
·                                            There is a saying in the financial industry, where is the customer’s Yacht? Which implies, if the investment advisors were so effective in making money for their clients, why none of their clients have ever made a fortune?
·         Stock tips and investment advice never created a rich, successful investor, the only way can succeed in the world of investing is by doing your own research carefully and buying good businesses for long term.  

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