If you want to make FORTUNE (40-50% CAGR) from stock market, you must be focused on Micro cap or SME stocks.
Investing is simple (b/c you know what you have to do) but not easy (b/c most investors fail to do so). We "human beings" are designed for instant gratification which goes against wealth creation.
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What actually makes you successful at stock investing?
Work really hard to find a mispriced bet. You can occasionally find one. But the wise one bet heavily when the world offers them the opportunity. They bet big when they have the odds. It’s just that simple. Look around, you will find successful investors like RJ invested in Titan around 2003 (dull period), Vijay Kedia invested in Aegis Logistics, Atul Auto, CERA (all these stock delivered 100x or more) around 2003 when market gave an opportunity. Investment done during 2003-04, 2008-09, 2012-13, 2018-19 (all dull period for the market) have given exceptional returns. We have 2022-23, again a dull phase as a golden opportunity.
Focus more on a few chosen companies. Being selective is a must. Your 80% wealth comes from top 10 insights. You are probably not going to be smart enough to find thousands of insights in a lifetime. And when you get a few, you really load up. It’s just that simple.
Big money come from high quality businesses. When you realize it, buy stake in the company not just few stocks (FASTLANERS).
The real skill lies in identifying those high quality businesses and then having courage to bet heavily. While general perception among investors is that these high quality businesses are expensive.
Specialization / Niche player are generally high quality businesses. Companies with economy of scale are more efficient.
If you have to choose one, bet on the business momentum, not the brilliance of the manager.
You have to figure out where you have got an edge. And you have got to play within your own circle of competence.
Nothing is automatic and easy. But if you can find some fairly priced great company and buy it and sit, that tends to work out very, very well indeed.
Remember that stock price is a slave of earnings and unless until earning improves, stock will not give you a sustained up-move. So, focus must be on EPS (Earning per share), EPS & Only EPS.
Get in when the bus (stock starts movement) starts, not when it is standing at the bus depot. For that you need to watch out for the recent quarterly earnings, if you notice that EPS of any specific quarter is up by 50% QoQ (YoY basis not sequential) along with rise in QoQ sales by 50% or more than you are looking at future 10-bagger stock. Margin expansion if any will be an extra topping on the pizza. Apart from these signs; lower equity, low or nil borrowing, good cash flow, better ROCE/ROE, increase in fixed asset etc. are the supporting criterion for a wealth creator.
Imp Note: If you want to earn some INCOME (10-12% CAGR) you can invest in large caps, if you want to create WEALTH (20-25% CAGR) you can invest in small & mid-caps BUT if you are looking to for a FORTUNE (40-50% CAGR) you must be focused on micro cap or SME stocks. This is proven statement and when you look around, you will find all successful investors who are sitting at 500-5000 Cr wealth today have created initial capital via investing in micro caps stocks ONLY.
Warning: In-spite of finding a potential multibagger micro-cap stock which can deliver 10-20x returns in 5-10 years, in-spite of doing a proper capital allocation of say 5-10% in that stock and ready to wait for 5-10 years too; you can’t create FORTUNE. This is because you need to have bigger capital in place to play big. Your initial capital or call it “PRINCIPLE” is THE MOST important component in creating huge wealth for financial freedom. From 5-10 Lacs you can create 50 Lacs or say 1 Cr in next 5-10 years but if your initial capital is say, 1-2 Cr or more today then you will be sitting at 10-20 Cr down the line 5-10 years which is sufficient money in Indian context to call yourself financial free.