'Anti-FOMO' Watchlist: 10 Indian Stocks to Lock Away Till 2035 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

The idea for today's video came from Thomas Russo, who is a famous fund manager in the US.

I heard him in a recent interview, and he came across as a unique fund manager to me.

Unlike most investors who like to have a lot of stocks in their portfolio, with holding periods ranging from 1-2 years maximum, Russo has built his reputation on a singular principle: own a few exceptionally well-managed, globally recognised brand-name firms and hold them for decades.

Yes, he owns few companies and once he buys them, he likes to hold them for decades.

For majority of us, our holding periods do not extend beyond a few months to a couple of years. Hence, to hear Russo say that he holds for decades, did come across as refreshing.

Well, it is not surprising that Thomas Russo considers Warren Buffett as his role model.

After all, it is the Oracle of Omaha who has perhaps pioneered the art of having a long holding period. 'My holding period is forever' is what Warren Buffett has said on many an occasion.

It will be interesting to see how this approach works in India. Is there a group of stocks in India that can be held for decades and if yes, how do we find them.

We will rely on 4 filters of Warren Buffett.

These filters are

• Is the business easy to understand
• Does the business have a moat
• Is it run by an honest management team and
• Is it available at attractive valuations?

Let's go through these points one by one and try and come up with a list of 8-10 stocks.

The first filter is whether the business is easy to understand. Well, this filter depends on an individual's circle of competence i.e. the kind of businesses he understands versus the ones he doesn't. And this may differ from person to person.

For e.g. an investor who is also a doctor will have a better understanding of pharma stocks whereas an IT stock would lie outside his circle. Likewise, an IT engineer would be more comfortable with an IT stock than a pharma stock. Hence, one will have to zero in on only those stocks for their portfolio where they have a general understanding of the business or the ones which lie well within their circle of competence.

An investor should strictly operate within his own circle of competence.

The next filter is whether the business has a moat? You see, over the long term, it is very difficult for any business to consistently keep earning returns greater than its cost of capital.

For e.g. if the cost of capital is 12%, it is difficult for a firm in India to earn return on capital or return on equity that is consistently higher than 12% over the long term. This is because of competition. If the word goes out that a business is earning say 20% return on equity, competitors will come in and they will drive the return on equity lower.

Hence, a typical company can earn return on equity higher than 12% for a few years till the time the competition does not come in and drag the return on equity back to 12%.

But there are very few companies whose products are in high demand or that put up entry barriers for competition such that they are consistently able to earn return on equity that's significantly higher than its cost of equity.

Such businesses are what Warren Buffett calls having a moat or a competitive advantage. Buffett likes to invest in such businesses and then hold them for decades. These are the businesses that create real value for shareholders over the long term.

Therefore, for our second filter, we will choose only those companies that have generated a return on equity of at least 15% each year for the last 10 years.

The cost of equity in India is around 13%-14% and hence, companies that consistently generate more than 15% can be considered as having a strong competitive advantage.

The next filter is the honesty and integrity of the management running the business. Now, to be honest, this is hard to reduce to numbers and is more of a qualitative thing where you have to observe the management and see how they have behaved with the minority shareholder over the years and whether they have conducted their affairs with honesty and transparency. Hence, I am living this to my own judgement and observation over the years.

Last but not the least, the last filter is about whether the business is available at reasonable valuations. It is my understanding -which is based on my own study - that a PE multiple of 40x is a decent upper limit for Indian stocks.

In other words, it is difficult to earn market beating returns if you consistently pay more than 40x to buy a stock no matter how good the growth prospects. Therefore, for our portfolio of companies where the holding period is recommended to be 10 years and beyond, the PE band has been set between 5x and 40x. No stock should be bought if it is trading at a PE of either below 5x or more than 40x.

So, there it is. The four filters for a 10-12 stock portfolio that one is supposed to hold for decades i.e. a minimum of 10 years.

Well, here is the performance of a portfolio that I chose based on my circle of competence and where each of the 10 stocks had an ROE of at least 15% each year for the last 10 years and where each of them was trading at a PE of between 5x and 40x.

Warren Buffett's 4-filter approach seems to have worked for this very long-term portfolio.

Our '10-stock' very long-term portfolio which was based on the Buffett 4-filters approach has done well versus the BSE Sensex as well as BSE500 indices.

This portfolio was started in December 2014 and over the next 10 years with zero turnover, has delivered almost 17% CAGR versus 11% delivered by the Sensex and 13% by the BSE500 index. It has only marginally underperformed the BSE Small Cap index, which gave 17.5% CAGR over 10 years.

Over the last 5 year also - shown as green bars - the portfolio has again outperformed the Sensex and the BSE500 while underperforming the BSE Small cap index.

Over a 3-year period - shown as dark blue bars - this portfolio has outperformed all the three indices by logging in 28% CAGR versus 10%, 14% and 23% from the three indices.

Thus, the very long-term portfolio has given a good account of itself and will certainly make both Warren Buffett and Thomas Russo proud.

Here's a list of 10 stocks that comprise this portfolio. These are stocks that pass all the four filters. The first filter of understanding of the business, which is subjective and based on my circle of competence. It does not have any pharma or IT stock or few other sectors which I either don't understand or consider as cyclical.

This is an equal weighted portfolio where all the stocks have been bought on 31 Dec 2014 and held till the next 10 years i.e. till 31 December 2024.

The second filter is a return on equity of at least 15% for each year over the last 10 years. Please note that I could come across only 70-80 companies that satisfy this criterion.

So, out of a universe of around 4,000-5,000 stocks, only 2% companies have managed to earn a minimum of 15% ROE each for 10 years. That's a pretty low number to be honest and tells you how difficult it is to earn a decent ROE on a consistent basis.

The third filter is of course the management quality where again I have used my judgement and my experience in the stock market to separate the wheat from the chaff so to speak.

The last filter is a PE multiple of between 5x and 40x at the time of buying so that we are not significantly overpaying.

These 10 stocks have passed all these 4 filters and have given market beating returns over a 3-year, 5-year and 10-year period as we just saw.

Now, which 10 stocks should you consider keeping on your watchlist as of December 2024 so that they can be held for the next 10 years. Which are the 10 companies that pass all the 4 filters of Warren Buffett and put themselves in a good position to outperform the benchmark indices.

Well, here are the names that I could come up with. Please note these names are based on my understanding of their business models and the quality of the management. Of course, these stocks have all earned an ROE of at least 15% for the last 10 years and were available at a PE of between 5x and 40x back in December 2024.

What do you think of these names and do you agree with the 4-filter approach or you think more filters should be added? Let me know in the comments section.

That is all from me today. I will see you again in the next session. Good bye and happy investing.