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How to Create Wealth from 1% of Listed Stocks podcast

May 7, 2022

Turns out the biggest wealth creators in the stock markets are businesses that have thrived for decades.

They are today just 1% of all the listed business.

Investing in them requires the skill that does not apply to 99% of the other listed stocks.

All of us have witnessed, if not participated, in a marble and spoon race, as kids.

The race barely grabs eyeballs. In fact, it often attracts the weakest of the sport aspirants. And for good reason.

It is slow and boring.

It does not seem to require any special skill.

The participants do not need the best level of fitness.

So, what makes the race entertaining? The fact that barely one or two participants manage to finish the race. The rest get dismissed as soon as the marble on their spoon rolls off.

As naive as it may sound, stock markets are no different.

You must first finish to finish first!

And that's why you must know how to create wealth from just 1% of listed businesses.

Hi...I am Tanushree Banerjee, editor of Equitymaster's bluechip recommendation service, StockSelect.

Welcome to Safe Stocks where we discuss ideas to create and preserve wealth in the safest stocks. If you haven't subscribed to the Equitymaster YouTube channel yet please do and click on bell icon to get notification for my latest videos.

At the risk of sounding too simplistic, the very nature of stocks that create the biggest wealth is that they are rarest of the rare.

Unfortunately, most investors who enthusiastically start out in the stock markets withdraw or get dismissed too soon. Few others manage to go some way, but their stocks keep failing in wealth creation. In fact, they roll off like the uneven marbles. Just a handful of investors manage to get to the finish line of their long investing horizon to see their stocks compound into true wealth.

The similarity between the marble and spoon race and stock markets is not unscientific.

In the marble and spoon race, most participants underestimate the importance of posture, concentration and goal setting. As a result, barely anyone reaches the finish line. The usual traits of speed, strength and agility do not serve well here.

Turns out the biggest wealth creators in the stock markets are businesses that have thrived for decades. They are today just 1% of all the listed business. Investing in them requires the skill that does not apply to 99% of the other listed stocks.

In fact, you can literally call it a hack.

Any marble and spoon expert, like yours truly, would tell you the hack for the race is simple. Place the marble carefully at the centre of the spoon and keeping your eyes glued to the marble and the finish line.

Similarly, 90% of the effort of wealth creation in stocks, is zeroing on the right businesses and holding them for the longest investing tenure.

Paying any attention to the chaos around or turning to see other participants can be the biggest risk in the marble and spoon race. Similarly, too much focus on other investors or volatility in the market, can never be the recipe for stock market fortunes.

Now, if you are worried of an impending market crash hurting your dreams of creating stock market fortunes, you aren't alone.

What if I tell you there's a strategy that is not only perfectly positioned to survive a market crash...

But it also stands to gain immensely from a market crash...

In the stock markets, the fortune of the benchmark indices has come to rest of few star performers over the years. The bulk of the investor money comes to them.

And investors firmly believe that only these stocks could create wealth over the long term.

But the fact is the performance of index stocks will, at best, trail the index over the long term.

So, if you are looking to make big gains in bluechips over the next decade, then you need to look beyond the Sensex stocks

You see, a lot of the quality bluechips are not just restricted to the Sensex alone.

If you widen your horizon a bit and look at let's say, the BSE 200 index, then there are quite a few bluechip stocks that are set to deliver handsome gains over the long term.

The easiest way to track what could help stocks have a long runway of superlative returns is to find qualities that can help them overcome every crisis.

For instance...

1. Capital efficiency

The companies that prioritise reinvesting profits to earn higher returns on their shareholders' equity rarely go wrong in capital allocation. Such companies are careful with capex and acquisitions. Plus, surplus cash is often distributed to shareholders. The idea is the more profitable the company gets, the more value it will create.

2. Low leverage

Minimal debt (debt to equity ratio) is extremely important for companies to tide over periods of tight liquidity and high interest rates.

3. Profitability with low capex

Companies that have already done the hard work of building plant and machinery or network for future growth, are typically in a ripe phase to benefit from their efforts.

4. Scope for PE expansion

Stocks with low PE multiples tend to have a huge room for PE expansion if the business and management went in the right direction.

If I must pick just one characteristic or ingredient that has been the key catalyst of these multibagger stocks, it would be their PE expansion. Larger the PE expansion higher has been the quantum of returns for the top multbaggers.

Here is the data to prove my point...

Gains (%) No. of Companies Avg PE 2009 Avg PE 2019
4,000 to 10,000 6 6.5 51.1
1,000 to 3,999 48 20.4 60.1
500 to 999 50 25.1 42.2
100 to 499 121 26.5 32.2
10 to 99 61 22.2 29.9
Data source: Ace Equity

The top 100 odd companies which gained up 1000% have had extraordinary fundamentals.

But what really made the difference between them and the 10,000% gainers was the quantum of expansion in PE multiples.

5. Last but not the least...Technology Catalyst

Technology has the power to change lives over time.

Imagine a world in the future where an autonomous vehicle picks you up for work. It plays your favourite playlist. And it makes a quick stop for your morning coffee. All this, without you having to reach your wallet or your phone. This is how devices enabled with Internet of Things (IoT), could transform our everyday lives.

The reason this technology is so important is because it could transform the future growth rates of multiple business. When I say that I mean businesses as diverse as healthcare, automobiles, financial services, retail and agriculture. Now, as an investor looking for exponential profits over next few decades, you cannot just look for tried and tested businesses. Or the most popular brands.

Rather you need to need to look for stocks where technology is acting is a huge catalyst of change that could offer exponential earnings growth in the years to come.

So just 1% of listed stocks can be the true gamechangers for your portfolio. Having the patience, perseverance and discipline to find and hold on to them can offer the compounding effect that 99% of the stocks can't.

Hope you like this video. Stay tuned for more such videos on the safest and most appealing permanent wealth creating stocks.

Tanushree Banerjee

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and Forever Stocks. Tanushree started her career at Equitymaster covering the banking and financial sector stocks and scrutinising RBI policies. Over the last decade, she developed Equitymaster's research processes that helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham, and Joel Greenblatt.

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