Investing Based Upon Business Model of Companies

When a forest catches fire, nothing can escape from it. Similarly, when the waves rise in the sea, at that time even the sinking boats also float on those waves. If we take a look at the US market history, then we come across a company named Enron, seeing the companies increasing profits; most of the investors started investing in the company without analyzing the company’s fundamentals and technicals. Later, when an accounting fraud came to light, the share of the company fell miserably. If we invest in the share of a company without analyzing the business model of the company then we can face a huge loss. In this regard, I remember Mr. Warren Buffet quotes, “It’s only when the tide goes out that you learn who has been swimming naked.” 

So when the share market is in an uptrend, the share price of average companies also go up along with those of strong companies. So it is important to invest after carrying out a thorough analysis. So how should one invest in such circumstances? Stay tuned to find out. 

The legendary investor Mr. Peter Lynch says that most people invest in the share market or invest in a particular share just because someone had asked them to. When the market is in an uptrend then the share price of most of the companies increases. The successful investor Mr. Vijay Kedia quotes that there are 4 types of companies in the market Large-cap, Midcap, Small cap & Bhangar cap. So we need to know the company in which we are investing out of these 4. 

When the share market is in an uptrend, the prices of certain companies also increase even though they aren’t as good fundamentally. But just because the market is in an uptrend, their prices too go up, and sometimes they even go above the circuit. Now here, the meaning of circuit is that the prices of these shares rise as much that the trading has to be stopped in there for a while. Now the investor here thinks that I need just one opportunity to get in here so that I’ll make a huge profit out of this trade. Once this uptrend is over, these shares fall as quickly as they rose and most of them hit a lower circuit. That means these shares fall such terribly that even if you want to, you cannot sell them. So without analysis, if we invest in such circuit shares, then our portfolio might catch a short circuit. In short the companies, you want to invest in for the long term, should have an excellent business model. 

Mr. Peter Lynch says if you plan to invest for the long-term, then invest in a company whose business model is easy to understand. So once when the company Enron was asked, “You have so many businesses, so how do you make money?” That discussion went on for more than an hour, but they could not answer how do they make money. And the funniest part is when the business owner was asked the same question, his reply was “How do I know, how does the business make a profit. These questions are related to accounts, so you should ask the accountant.”

And when the accountant was asked the same question, he replied, “We have so many businesses that when one makes a profit, that profit helps us fund the business that is making losses.” So the accountant himself didn’t understand a word out of what he spoke neither did the ones who asked the question. While leaving the accountant said, “We do not know what you’ll be printing, but make sure that the image of the company should be enhanced after this interview.” Later when Enron’s fraud came to light, its share fell miserably and investors faced a huge loss. So if you plan to invest for the long-term systematically then make sure to check that its business model isn’t like Enron. 

Now consider there is toothpaste making company, so we can easily find out how many toothpastes did they manufacture the previous year and if itʹs manufacturing more tubes of toothpaste this year and can sell them off as well then we can say the company can earn profits. Similarly, if it increases the price of tubes of toothpaste this year and still manages to sell them all, then too there is an increase in its profits. Similarly, consider if it’s a footwear segment, so here too we can find out how many footwear’s were manufactured in the previous year and if they manufacture even more footwear’s in the current year and can sell them as well then the company will be able to earn even more profit and the business model is easy to understand as well. 

Now consider the company is manufacturing coffee, chocolate, baby milk powder then too we can find out how much they had they produced in the previous year and how much have they produced in the current year and whether they can sell that off as well to earn more profit. So if these types of companies can earn high returns on invested capital then and are again re-investing the same in the business to expand it then such companies are nothing but compounding machines. And if we invest systematically for long-term in such companies then we can earn a good profit. If a common investor invests for a long term in such companies then he too can earn uncommon profits from this investment.   

When the share market is in an uptrend then the shares of the companies having sound fundamentals along with the ones with not so good fundamentals can also witness a temporary increase in the prices of their shares. Just like what we have sown, when we do farming, what we have not sown with it also grows. Similarly, when the waves rise in the sea, at that time even the sinking boats also float on those waves. So while investing, what type of company we opt for is very important. The main thing is when we plan to invest for the long-term, we should opt for the company whose business model is excellent, the company should be fundamentally strong and its business model should be easy to understand as well. 

So the companies wherein you wish to invest to for long term should have excellent Return on invested capital or return on capital employed. Also, its debt/equity ratio should be low or negligible and its top line and bottom line should be continuously growing or it is expected to grow shortly. And the most important thing, the company we plan to invest in should have an easy to understand the business model. 

For the last 12 years, I have always discussed it in all my past seminars, training programs, articles, tv interviews, radio interviews as well as all my videos that if you invest for a long term in companies having the sustainable competitive advantage as well as companies earning a high return on capital then you can earn excellent returns here if you continue investing systematically here. Also, a lot of people gave their feedback saying the companies which we’ve been discussing have performed well and when I asked them so how much returns did you earn from all those investments? Their answer would be, “No-No, we did not earn anything, we were just tracking the movement of those shares and didn’t invest in them.” Sigh! You will have to go out and invest to earn good returns, just observing won’t help. 

I have discussed this in the previous videos as well that the companies having a sustainable competitive advantage, the companies that earn high return on invested capital, those companies which are similar to a fort outside which there’s a trend filled with water carrying crocodiles. So if you invest systematically in such companies then you can earn good returns there. When we invest systematically in the market i.e. invest less when the market valuation is expensive while investing more when the market valuation is inexpensive. Why this technique helps is because if the market crashes from here then we can start investing again and later when the market will rise from here, we’ll be able to earn good returns here and in case the market had risen after we had invested, we would have made a good profit there. 

So if we invest systematically in the companies that earn an exceptional return on capital and also are low debt companies then history says, we can earn good returns here. Hence, if you wish to invest systematically or in a lump sum then we have a special service for you known as Wealth Compounding Machine. If you wish to, you can subscribe to it. Wealth Compounding Machine includes an educational presentation wherein it guides you as to how your portfolio should ideally be in the long run and it is updated regularly as well. Again, if you wish to, you can subscribe to it.

If you wish to trade for short-term or medium-term then first thing is to check the market valuation, then you need to check the market direction then check the direction of the share, you wish to trade in and if that share has freshly come out of the box then you can trade thereby placing the right stoploss. So you can trade in such shares using limited capital along with a stoploss to earn good profit here. 

If we analyze the current data, we’ll find that Nestle and D-mart India which have a fantastic business model have indicated moving out of the box, so you can opt to trade here but along with a proper stoploss and trade with limited capital as the market, valuation is expensive. Also, you can go wrong anytime, otherwise, you would blame it on us. 

If you wish to learn short-term and medium-term trading along with case-studies and handholding support then for that we have our Smart Investor Training Program; if you wish to, you can subscribe to it as well. If you wish to open your Demat account with India’s leading brokers, then you can check out the link given below. 

We may or may not have our investment in the companies discussed here. We would like to give a disclaimer here that all the advice given in this blog is for educational purposes. This is not any kind of buy/sell recommendation. Mr. Bhuushan Godbole, his company as well as the director board of the company has crores of investment in the share market as well as in gold and silver. This is our disclaimer/disclosure. So we’d like to mention this again that invest in the market after thorough analysis and also after discussing it with your financial advisor. 

Be it long-term investing or short-term and medium-term trading, the companies that you are or will be trading in should have an excellent business model. If the business model isn’t excellent, then avoid trading or investing in such companies. Not to forget, patience works wonders in the share market. 

Hence, if you invest systematically in the companies that have an excellent business model that earns exceptional returns on invested capital and also are low debt companies then you can earn good returns there. 

Until next time…

Happy Trading, Happy Investing!!!

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