DNA of Crash Proof Stocks

Have you heard of 'single stock exchange traded fund'?

Bull market stories are replete with examples of investors doubling down on hot and overvalued stocks. Ones that are already priced to perfection.

Until a few months back, super performing American stock Nvidia had entire funds and ETFs dedicated to the single stock. Only so that investors could use leverage and derivative tools to amplify their returns from that sole scrip.

That the risk from such bet is far higher than the potential return was completely lost on investors.

The excitement of participating in such thrilling activity with hundreds of fellow investors typically keeps common investing vigilance at bay. This is observed at the peak of every bull market.

On the other hand, the idea of buying and holding stakes in businesses that can keep doing what they are good at, for decades, seems outright boring.

But the fact is that such businesses are rare.

Barely few businesses manage to grow, stay quite profitable, continue to be relevant, multiply shareholder wealth and maintain leadership for years together.

Most wander in pursuit of higher growth or quick profitability.

In some cases, it is the sheer boredom of consistency that persuades management to take wrong decisions. In doing so, they destroy shareholder wealth created over decades, in months.

This is worrying for any investor who wishes to hold the stock for decades.

Even a legend like Warren Buffett endured this problem with his long-term holdings. He wrote in his 1996 annual letter to shareholders of Berkshire Hathaway...

• Loss of focus is what most worries Charlie and me when we contemplate investing in businesses that in general look outstanding. All too often, we have seen value stagnate in the presence of hubris or of boredom that caused the attention of managers to wander.

Compounding the company's profits over the longer term tends to get boring especially when the external environment offers 'exciting' opportunities.

As a result, investors in these firms run the risk of their management teams doing too little to sustain their competitive advantages.

Or too much to chase the so-called exciting opportunities aggressively.

So, what are the areas that pose the most formidable risks in judging management's credibility?

Capital Allocation

The greed of fast growth often leads managements to diversify into unrelated business, leverage balance sheets, undertake huge capex or buyout businesses at steep valuations. Such misallocation of capital can be a drain on shareholder returns.

Consider this. FIIs taking a flight to safe haven and a sharp currency depreciation are not new risks to Indian stocks in 2025.

Just like in 2025, during 'taper tantrum' of 2013, foreign institutional investors (FIIs) exited Indian stock markets in droves. The rupee depreciated over 15% between 22 May and 30 August 2013.

A decade since then, certain stocks managed to overcome every hurdle.

TCS, Bajaj Finance, Eicher Motors and HDFC Bank saw their respective market caps multiply 4 times, 78 times, 11 times, and 8 times respectively over that decade. This was primarily due to good capital allocation.

Meanwhile, the stocks of MMTC, Suzlon Energy, Reliance Communication, Punj Lloyd, which were reasonably strong players in the stock markets in 2013, were decimated due to destruction of shareholder wealth.

Succession Planning

In a family run business, the risk of poor succession planning can jolt the trust of investors in the management and dent the valuations of the stock.

In few cases, where the company has had a long-standing professional management team, its exit can also cause jitters, until the new team establishes its credibility.

Cash, Debt, Buyback, Dividends

Sudden change in the management's stance about using cash for dividends or buybacks or using debt to pay dividends etc can also raise questions about the management's intention to protect interest of minority shareholders.

Innovation and R&D in DNA

Managements that do not show the foresight to invest in R&D and keep product or service innovation in the company DNA run the risk of faring poorly when compared to competition.

At the same time, prolonged investments in loss making products or subsidiaries are also seen as a negative.

But business that have had R&D as their core for decades have significant advantage when it comes to technology tie-ups and credibility in global export markets.

For instance, Hindustan Aeronautics (HAL) has advanced its indigenous development programs, including the HTT-40 Basic Trainer Aircraft, Indian Multi-Role Helicopter (IMRH), and LCA Tejas Mk1A, while collaborating with global players like General Electric for engine manufacturing.

Looking ahead, HAL expects orders worth Rs 1.7 trillion over the next three years. Its robust capex plan of Rs 30 bn annually through FY30 aims to expand manufacturing lines and enhance R&D capabilities.

With the government focusing on defence, HAL is well-positioned to capitalize on heightened defence spending and export opportunities.

Regulatory compliance, Reach and Relevance

Managements that fail to comply with regulatory requirements and end up getting penalised by statutory authorities can end up sacrificing market share, reach and investor trust.

So, even if the company continues to remain financially sound, the management's inaction and lack of transparency during period of stress or overtly aggressive stance of growth, pose sustainability concerns.

When recommending stocks to be held for a decade or more, my preference is skewed towards managements that focus on sustainability and build firewalls. Both, to protect the business against internal challenges (too much debt, diworsification etc) and from adverse external forces, from time to time.

For instance, in the case of Kotak Bank, HDFC Bank, and Bajaj Finance the temporary embargo on new deposits placed by RBI were something that allowed the managements to fortify their systems and balance sheets.

The banks have upgraded technology and hired expertise to accommodate higher rates of growth in the coming years.

Remember...the Crash may Not Last Too Long

Unlike few decades back, businesses today manoeuvre themselves according to the winds of change more proactively.

Particularly, in the cases of tight liquidity and technology disruption.

The liquidity scenario was very different in early 2000s when interest rates were closer to 10%. Then, most companies in India were capital intensive and cyclical in nature.

So, at the turn of every cycle, market valuations reverted to the mean, offering investors reasonably prolonged buying opportunities at attractive valuations.

Is that relevant today?

Most business today are asset-light or digital services. Even debt heavy, cyclical ones pay paltry interest rates.

So, the concept of reversion to mean, though theoretically sound, could occur only in cases of extreme overvaluation and only in rare and very short durations.

Therefore, go ahead and make a watchlist of stocks that have crash-proofness in their DNA. The temporary correction in the stock prices, during the crash, could possibly only be a blip in their long-term upside.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)