The price-to-earnings ratio is often overvalued by investors (PE). However, one must understand that “the top line is vanity, the bottom line is rationality, and the bottom line is truth.” In developing a good business, cash flow is significantly more crucial than earnings. There are numerous strategies to manage profitability, but manipulating cash flows is extremely difficult. Cash flows and earnings are undoubtedly the most essential factors for companies that have produced long-term value.
Markets place a lower value on companies with high profitability but low cash flow, and vice-versa. Be wary of companies that are solely focused on generating quarterly profits and fulfilling market expectations at the expense of cash flows.
Lessons from an ace investor in India
Growth is desirable, but not at all costs.
If there is no growth, no business can build long-term value. Not all development, though, is beneficial. High growth is poisonous and kills the value of a company if its return on equity (ROE) remains below the cost of equity for lengthy periods of time, as the company must constantly issue money to satisfy its expansion needs.
To stay in balance, meditate.
Successful online investing requires spiritual anchoring. Meditation unites the mind, body, and soul, allowing one to stay grounded and focused. Investors are either preoccupied with the future or preoccupied with the past while ignoring the present. Meditation improves brain clarity, increases emotional quotient, and reduces stress. The stock market enchants us with success while draining us with failure. Meditating for 15–30 minutes a day can help you retain a sense of equilibrium during both of these periods.
Invest in high-quality businesses.
Invest in companies that can provide superior returns on capital over long periods of time, as well as the growth that allows them to reinvest cash flows back into the business. As a result, the value of the company and the stock price compound. Concentrate on the company’s earning capacity rather than the earnings themselves.
Instead of just picking stocks, build a portfolio instead.
Build a portfolio that can withstand large losses while avoiding permanent capital loss. It’s crucial to do well during an upcycle, but it’s much more important to do well during corrections. When it comes to portfolio creation, there are two schools of thought. A diversified portfolio, also known as the “Gorilla to King Kong” method, is my preferred technique. You put your money into a diverse portfolio of 50–60 industry-leading businesses (Gorillas).
Processes and inputs are being worked on.
We must face the harsh reality that we have no influence over the outcome. Our process, inputs, stock selection criteria, and attitude are all under our control, and they all contribute to the intended outcome. Build a sound investment framework and philosophy that fits your investment style and temperament, then tweak it as you go.
Being patient and drowning out the noise
Filter out the noise and stay focused to achieve long-term success. Some investors get carried away by short-term stock price movements, which gives serious investors a long-term advantage. If a good firm is experiencing a brief setback, now is the perfect moment to invest, especially if the setback has no influence on the company’s fundamental worth.