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Most people say that one should buy a high ROE, high ROC company. Ramdev ji says that if the ROE of a company is more than 30% then it is a great company. If it is more than 15% then it is a good company and if it is less than that then it is a bad company. There are three types of businesses. Great good grow.
So you have a very good business. You are good business and you have outright bad business. 90% of businesses are outright bad businesses. So if you can cut out those bad businesses. I mean the companies which either make losses or make the profits less than the cost of capital I mean 7% 8% and you know they all so called textile companies types you know and sugar companies even lot of cement companies also like that so they don't make money and they have the fancy names and kind of thing that if they don't make money you are going to make money very clearly and there 80 90% of the companies they come in that category.
Then you have the good companies which are about 80 90% like all the well run banking companies finance companies there are about 20 then you have the you know wonderful companies like Assian Paints Hindstan Liver Nestle 25 30 companies like there they are great companies. If you can get a great company at a reasonable price, you're done.
I mean, you need four to five stocks like that that your portfolio does very well. But I try to make my entire portfolio 15-20 companies filled with good companies and one to two great companies. And I make sure that there is no that company in my portfolio. No bad businesses. At 7% return on equity businesses.
I just hate to have it in my portfolio and that's where people get stuff because they look so cheap but they are actually the most expensive business. And on the other hand Vijay Kedia ji says that there is no need to look at ROE. Actually I do not give much importance to this ROC and ROC and ROE and all across your innocence.
Or you never bought a stock on this. Yeah. Based on this I never bought any stock. It should be reasonable. You can't get a small company. You can not get ROC RR 20 and 25 then stock would also be expensive. It has to be below five. Ok. Whatever parameters you are looking for, it should not match them then the price will be a dear, it will be expensive.
Earlier I used to be on Ramdev ji's side, I also used to think that if ROE is more than 30%, ROC is high then the company's business is good, but the data tells something else and after knowing that data, my way of thinking about investing changed completely. What does the data tell? 75% of the multibaggers that you see on the screen do not come from fundamentally sound companies.
High ROE, cash flow, positive does not come from all these. They come from bad companies, from companies that are so small that normal people call them penny stocks. The thing is ROE which Sir said makes a business bad. A business becomes good. Nothing like that. Its prime example is Reliance and Nestle, who made more money if you had invested in both together, who would have made you richer if you had started both the companies together, Reliance whose ROC is 8%, ROE is also 8%, Nestle whose ROE is 83%, once 100%, has gone down now, but despite that both started at the same time, almost the IPO of both came with a gap of one year.
Reliance's was worth Rs 10 crore and Enstle's was worth Rs 43 crore. But today there is a difference of 29 times in their earnings. There is a difference of 30 times and the ROE is 10 times lower. Whose? Reliance's earnings are 30 times more. Where did this math change? Where despite having higher ROE, higher returns are coming from Reliance.
The invested equity capital of NSL is only Rs 4000 crore. It cannot go beyond that because whatever is beyond the kind of business it is, it goes out in dividend. So, an ROE of 83% at a market cap of Rs 4000 crore gives a profit of this much. If it increases by 10%, it increases by around 300% next year.
What is the total? 3600 crores of your money next year, after one year, same money in Reliance after that many years, if today you were sitting in both of them together, then you would have because all are setting up refineries. You are working in telecom. you are everywhere. You don't care about ROE.
It makes a difference to you how much I can invest, then your capital would have been Rs 12 lakh crore invested in which you would not have got 83% because where can you invest 83% of the capital, it would have come in very few places, even 8% would have been Rs 1 lakh crore, if it had grown by 10% next year, which Reliance is growing now, then that profit would have increased by Rs 10500 crore, it would have increased by 10 times more than the total profit of Reliance, that much more.
What is the difference in ROE here? 10 times. When did it start? Together. Mukesh Ambani spends Rs 5000 crore on his child's wedding. That is the profit of the family only. And why did this happen? Because 8% of 12 lakh crore which is compounding at 11% has increased more than that, 83% of 4000 crore which is not compounding at 11%, he has been giving dividend because he cannot increase it because he does not want to increase it, it is a fact that the share of ncle India trades at three times more valuation than Reliance, so if you had invested in both of them together when their IPO came, then the CAGR would have been the same, but this could have happened only because the PE of ncle is three times more.
Otherwise, Reliance would have been a much better stock. The PE of NSE is three times higher than that of the company which owns it, its own PE is 20. By holding the same stock three times less than the previous one because it is in another market, the madness of the Indian market and its dividend yield is also three times more.
So nothing happened here due to ROE. When Tata Group started the work, it started with Tata Steel. Today the ROE of that company is 3%. Never more than 10 12 20% above. That too happens in rare years. That's his growth zero. It is near zero. That too is a company worth Rs 3 lakh crore today. 10 crore earns 2000 crore.
By investing that money in more than one business, I acquired good businesses. Like Titan and TCS, the group became very big. Meaning growing business not high ROE business. Where growth is possible, where capital can be invested and even Ambani, the present richest person of this country, when he started it, from which business did he start it, Coal Ports Power, what is the ROE in this business, how high quality is the business, what is the brand in it, still he is the richest, there are some other reasons behind it but there is no ROE, if there is no ROE then ROE only tells how efficiently the business can run.
It does not tell how big the business can become and we want that which after becoming big earns 10% on a big money in lakh crores or 10 lakh crores and not 1000% in ₹100 or ₹100% increase once, neither you get it in exchange of ₹100 and keep getting ₹1000 every year or you get 1% on ₹1 lakh crores which means you keep getting thousand crores every year, then what will you choose?
So the market also chooses the same. The market looks at how big the company can become in the future. How much can Aarohi earn on top of that. She does n't see how much she is earning today. It looks at growth rate and only growth, the prime example of which is startups. They are loss making. Their ROE is in negative.
Completely opposite to what Ramdev ji is saying. So there is no negative ROE in that. But he became a wealth creator for his promoters and his investors, if done in the beginning then ROE has been outdated. ROE can be used. Ramdev Agarwal ji is right. But this thing that comes up here is about ROE, which is 20, even 25, 30 years old and comes from Warren Buffett.
The market keeps changing the investing metrics every 20 years and they keep changing on their own. Sometimes it was dividend, sometimes it was book value, sometimes it was growth, sometimes it became ROE which is again growth. So if there is a world war again then there will be book value and dividend.
It is a market, you have to see what to expect and when. So ROE will work but only in large caps and stabilized companies and even in that the growth rate will matter more. Its weightage will be very high. And because this thing was said by Ramdev Agarwal ji from here 8-10 years ago. He himself has changed the topic and he himself has invested in Zepto which is loss making right now but is growing 100%, it is growing at 60% year on year, so he himself has changed, he has accepted that ROE is not the only thing and I have also accepted that ROE is not the only thing, the only thing which is the thing is growth with good management and not a random growth, this growth is that we will keep doing as we are going to do and the interesting thing is that when we say textile company earning 7-8%, then only Reliance comes to mind.
It started as a textile company and even today it earns 7-8% on its capital invested.
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