How to Find the Top 1% Stocks ? My Step By Step Stock Selection Framework

Summary

In this video, Pranjal Kamra introduces Finology 30, a framework designed to identify India's top 30 businesses from over 6,000 listed companies. The process is based on nine key factors, including simplicity in business operations, strong branding, proven competitive advantages, reasonable pricing, free cash flow, and long-term consistency. The focus is on businesses that are easy to run and capable of thriving on autopilot, rather than relying on the intelligence of management. Finology 30 aims for steady, long-term growth, avoiding hype and emotional investment decisions while maintaining a disciplined, quality-over-quantity approach.

Takeaways

• 😀 Focus on selecting businesses that are simple to run, even by an average person, ensuring long-term sustainability.
• 😀 Look for businesses with a proven competitive advantage (MOT) that protects them from competition.
• 😀 Prioritize quality businesses over cheap ones, even if it means paying a premium for solid, established companies.
• 😀 Aim for businesses that generate free cash flow, as this ensures growth and stability even in tough times.
• 😀 Choose companies with strong, recognizable brands that are likely to continue performing well in the future.
• 😀 Avoid the temptation of momentum-driven stocks or trends, and instead, focus on businesses with consistent long-term potential.
• 😀 Avoid over-diversification and excessive risk. Focus on a few high-quality companies rather than trying to invest in everything.
• 😀 Look for businesses that are stable and have simple models, ensuring they can continue growing even without extraordinary management.
• 😀 Always consider the long-term horizon for investments rather than seeking quick gains or chasing the next big thing.
• 😀 Pay attention to the market conditions and avoid being influenced by hype, short-term sentiment, or recent trends.
• 😀 Don’t try to find the next “multibagger” stock. Instead, focus on steady, consistent growth with reliable returns over time.

Q & A

What is the main goal of Finology 30?

The main goal of Finology 30 is to help investors build a long-term stock portfolio by selecting India's 30 best businesses from over 6,000 listed companies, providing them with a new stock recommendation every 12 days for 12 months.

Why does Finology 30 focus on providing a framework for selecting stocks?

Finology 30 aims to share its stock-picking framework with the public to make it transparent. This way, even those who are not subscribers can apply the same framework in their own stock-picking decisions.

What is the first principle for selecting stocks in Finology 30?

The first principle is to pick businesses that are simple to run, so even an 'idiot' could manage them, as this ensures stability and longevity of the business, even if leadership changes or faces challenges.

How does the idea of a 'simple to run' business apply to stocks like Coca-Cola?

Coca-Cola, despite its long history, operates with a simple business model of selling sugary soda, making it resilient over the years. Even if its leadership changes, the brand's success continues due to its straightforward operations.

What is the importance of a company's competitive advantage in Finology 30?

A company's competitive advantage, such as a unique business model or network effects, is crucial because it helps the business earn more money or prevent competitors from overtaking it. It ensures long-term stability.

Why does Finology 30 prioritize quality over cheap stocks?

Finology 30 emphasizes investing in high-quality businesses at reasonable prices rather than cheap, low-quality stocks. The focus is on long-term sustainability and avoiding poor investments that may look cheap but offer little value.

What role does free cash flow play in the selection of stocks?

Free cash flow is essential in stock selection because it represents the money a company can use freely, without any commitments. A strong free cash flow allows companies to acquire competitors or diversify, ensuring consistent growth.

Why does Finology 30 focus on slow and boring companies?

Finology 30 prefers slow and boring companies because they tend to have stable growth, are often undervalued by the market, and are less likely to be affected by market hype. They can continue to grow steadily over time.

What is the approach of Finology 30 towards momentum stocks?

Finology 30 avoids momentum stocks, which are heavily hyped and often focused on short-term gains. Instead, the focus is on long-term consistency, and the team avoids making decisions based on current trends or news cycles.

What does Finology 30 mean by avoiding 'aggression, leverage, and excessive diversification'?

Finology 30 avoids over-aggressiveness, excessive leverage, and over-diversification because these factors can lead to financial instability. The focus is on deep investments in a few strong sectors rather than spreading too thinly across many.