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Hello. Have you ever wondered if we can apply the strategy of a great and legendary investor in today's Indian market? So that's what we're going to do today. We will understand Peter Lynch's investing secrets and see how to use his principles to find better investment opportunities in India. Let's get started.
Look at this number on the screen. 29% is no small figure. This is the average annual return that Peter Lynch's Magellan Fund earned for 13 consecutive years, not just one or two years. Come to think of it, this is an extraordinary achievement and clearly shows how powerful and time-tested his strategy is.
So what was the secret to Lynch's success? A four letter word GARP means Growth at a Reasonable Price. The meaning is quite simple. Find great companies that are growing rapidly. But don't overpay for them. It's a great balance of growth and value. So how will our journey be today ? First, we will understand the greatness of Peter Lynch.
Then we will see why their American strategy cannot be directly copied and pasted in India. After that we will make an Indian screener step by step. We will see its consequences and yes, in the end we will learn the most important lesson. So the question is, why is Lynch's strategy so special ? See, his success was n't just about great returns.
This was about his discipline. He always focused on financially strong companies. He stayed away from market hype and rebalanced his portfolio from time to time. But there is a challenge here. We cannot copy and paste Lynch's strategy as it is. Why? Because their rules were made for the American market of that time.
The Indian market and its economy are completely different. Therefore, we have to adapt their strategy to the Indian context. Let's look at a simple example. Lynch looked at companies with market caps over $1 billion. In today's India, we will set this limit above Rs 1000 crore so that more companies can be included.
See, this is a small but very important adjustment. Okay, so now let's come to the most interesting part of this analysis. We will create a filter for the Indian market using the principles of Peter Lynch which will help us find the right companies. So let's make it step by step. Our first step is to reduce the crowd in the market.
Meaning we only want companies that meet a certain size and growth rate. So let's apply our first two filters. So here are our first filters. The market cap of the number one company should be more than ₹1000 crore. Number two, both their sales i.e. revenue growth and their earnings i.e. EPS growth should be more than 12% in the last 3 years.
This ensures that we are only focusing on companies that are consistently growing. Ok? So now we've got growing companies. But is every growing company a good one? No. We also need to check how is the quality of the company ? Is he financially stable or not? And this is where our quality and solvency filters come into play.
Now our job is to ensure that these companies become strong. Peter Lynch used to call it taking out the financial garbage. For this, we will select those companies whose return on equity i.e. ROE and return on capital employed i.e. ROCE both are more than 15%. And most importantly, their debt should be less than half of their equity.
There is a famous saying. Profit is an opinion. But cash is a fact. Cash flow was extremely important to Peter Lynch. So our next step is to make sure whether the company is actually generating cash or just showing profits on paper. Here we will examine two key things. First, free cash flow ( FCF) should be positive.
This is the money that remains in the hands of the company after all expenses and investments. Second, cash from operating activities must also be positive. This clearly shows that the company's core business is making money. Remember we talked about Garp at the beginning? In that, R meant reasonable price.
So now it's time to make sure we're not paying too much for these great companies, and that's where our valuation filters come in. Now let's talk about the price. We have to avoid companies that are too expensive. Therefore, we will choose companies whose price to earnings (PE) ratio is less than 30 and price to sales ratio is less than 2.
This ensures that we are paying the right price for a good company. Finally, we add a technical layer. Look, just getting a good company is not enough. We also have to ensure that the stocks we are selecting are not in decline. Lynch believed that it is better to buy a good company when it is going up so that our capital is not stuck.
There are two simple rules for this. First, the stock price should be above its 200-day exponential moving average (EMA). This is a sign of a strong uptrend. Secondly, the share price should have increased in the last 6 months. This shows that the stock is moving in the right direction. So we've created all our flutters.
Growth, Quality, Cash Flow, Valuation and Momentum. Now let's see what happens when we apply all these criteria together. The results must be quite impressive and look at how powerful this process is. We started with about 2800 listed companies. This number dropped to 250 after applying only the growth filter.
And when we applied all the filters, quality, cash flow, valuation and momentum, we were left with only a handful of companies. In this case, just four. So a very important question. Does this mean we should just go and buy these four companies ? The answer to this is absolutely not. And it's most important to understand that this screener is not a buy list.
This is a starting point for research. These filters lead us to potentially good companies. But the real work begins now. Yes, the real work begins now. Now we have to delve deeper into these selected companies. Have to read their investor presentations. One has to analyze their con call transcripts and understand their business model properly.
This qualitative research is what makes a good investor a great investor. So what do we learn from this whole process ? Is it just about finding a new formula? No. The lesson is much deeper than this and this is its biggest conclusion. The real lesson is not to blindly copy a formula but to understand the fundamental principles of Peter Lynch.
Quality, growth and fair price and then adapting those principles with discipline to your market and your time. One important thing is that all this information is for educational purposes only. Investment in the securities market is subject to market risks. Therefore, always read all the relevant documents carefully before investing.
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