How do Wealth Creators build a winning portfolio?
All successful investors have a wealth creation machine and this is nothing else but their Investment Portfolio. They focus most on just one question – what business to own in the portfolio? Here are 10 areas to focus when creating a winning portfolio:
Criteria # 1
Wise investor plays the long-term game therefore picks up only high-quality business.
Criteria # 2
In life and in investing follow simplicity. Wise investor invests in simple business that is easy to understand.
Criteria # 3
A wise investor is always looking for business that have moat around them. It can be in any form like superior technology or brands, high switching costs or high entry barriers.
Criteria # 4
One key area for the investor is the identification of the companies with consistent earnings. For example, largest automobile company in India, Maruti Suzuki has steady stream of earnings growth over a long period of time.
A company that can deploy large profits back into the business at high rate of return and for long time will result in high compounding for long time.
Criteria # 6
A wise investor looks for a company that is in the business of essential products or services and have a margin of safety. For example, a telecom leader like Bharti Airtel will continue to be in demand for the foreseeable future as need for data services keep rising.
Criteria # 7
Price Earning and Earnings growth both matter in order to reduce the payback period of investment. This is best measured in the Earning Per Share of any stock and the growth will decide the stock price growth over long term.
Criteria # 8
Once a wise investor identifies a suitable business to invest then it is all about valuation (price to pay). It is neither clear nor easy to come up with true or intrinsic value as this involves the estimation of future cash flows over a long period of time and an appropriate discount rate.
A wise investor always checks for the management integrity and governance standards before investing in any business. For example, HDFC is a group with multiple companies (bank, insurance and AMC) with great governance standards.
Criteria # 10
A winning portfolio is finally diversified and therefore contain 12 to 15 stocks or companies from different sectors and market cap.
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Note: Investments in stocks are subject to market risk. Stocks mentioned above are only for explaining the point and not a stock recommendation. Make necessary due diligence before investing in the stock market by consulting your Financial Adviser.
