While reading about various companies which have witnessed 100+ times returns in the past what has perplexed me is how to have an understanding to catch these companies at an early stage. What do we need to look at . What has not helped my case has been the fact that almost none of these companies pass the traditional tools that people preach on investing. Factors like huge cash generation, good ROCE’s, operating profits are something which have alluded these firms at initial stages. Among all these no matter how much I read I have not been able to pinpoint one single factor out which has helped me in my initiative. The traditional investment tools will never help in identifying such firms at an early stage. No numerical analysis will ever help. Why would we buy a firm which has a negative net worth. Has had operational losses and has no timeline on when it will be turning up a profit.
In my pursuit of holy grail, of trying to find what it will take for me to have the visionary power to understand such companies in infancy which eventually will lead to windfall returns i have read numerous financial terms, tried to understand how to apply ratios to companies, etc etc. More or less it has been an ever continuing journey to find what really can help me in getting a successful investment process at the back of my head.
The result of all the reading up to now has made me understand one thing. I don’t yet know what is the most important factor successful investors look for in a company. They vary from investor to investor. What is comfortable for one could be difficult for another. The things that i have found the most important until now has been studying the size of opportunity and management focus. Those two in my mind are the most important factors i look at when investing in a company. What my experience tells me is that these two factors, if in favor for a company could make or break a company.
A huge available and growing market for the products in which the company operates gives the company an opportunity to succeed in the long run. It gives the benefits of scale and the chance of success better than other.
However, what use is opportunity if intent is not present. This is where management comes in. If the company is run by a professional who is passionate about success, it invariably will be a successful initiative. History has demonstrated this and so these are two factors which i give a very good thought to while scouting for investments.