Learn time-tested wealth creation strategies for long-term investors from the Motilal Oswal Wealth Creation Study for the period of 1992-1997 and how existing investors can learn from them.
Investors have long been intrigued by the promise of wealth creation strategies for long-term investors. As market trends have come and gone, the fundamentals of these strategies have actually proven surprisingly static. The Motilal Oswal Wealth Creation Study between 1992 and 1997 forms a potent historical play for understanding these themes. In this blog, we’ll delve deeper into the findings of this study by looking at what made certain companies thrive in such a situation and finding out how today’s investors can use these lessons, making the discussion more complete with insights from great investors like Warren Buffett and Peter Lynch
Table of Contents
The Contradiction of Wealth Creation in a Downturn
The years 1992 to 1997 were not at all favorable to the Indian investor. BSE Sensex fell by 22%, compounded annually at -4.7%. However, behind that gloomy trend lay the story of some companies which not only survived but prospered. In that sense, the lesson from this is that wealth-creation strategies for long-term investors do work even when the markets are down.
Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.” In this context, the persistence of wealth creation says that long-term vision beats short-term market noise. As an investor, we must peel off daily volatility and get our minds to where the intrinsic value exists in the companies to which we hold. The lesson from it is timeless-the same in the present as it was in a downturn as spectacular as the 90s were.
Below are the FASTEST and BIGGEST wealth creators from the INQUIRE 45 for the period 1992-97.
High Entry Barriers Matter
The insurmountable theme that cuts across in the wealth creation study relates to how businesses associated with high entry barriers are set to create long-term value. This means that such companies are mainly working in industries like pharmaceutical, automobiles, and consumer goods. Why do entry barriers matter? They limit competition and make the companies sustain pricing power and profit margins over time.
For instance, the company that stood at the top of the list of the wealth creator was Cipla Ltd. Its CAGR over the period under study was 47.4%. The drug or pharmaceutical industry is one that goes with rather high regulatory and R&D cost. This makes it a very tough niche for new entrants to match their market performance with the established players in that market. Thus, Cipla enjoyed market leadership, grew profits, and therefore created wealth for its shareholders.
In the current era, some other industries such as in technology and biotech shares some similarities. Very few companies, such as Google or Pfizer, had high barriers to entry with their great R&D budget and intellectual property along with market dominance. These industries offer great wealth-generating opportunities for investors who aim to hold investments for long periods of time.
🎯Look for companies that possess a sustainable competitive advantage. As Buffett put it, “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
The Dominance Factor: Leaders Outperform
Of the 45 wealth creators in this study, 30 ranked top in their respective industries and 29 companies have grown faster than the industry rate of growth. This suggests that industry leadership is a critical feature of wealth creation strategies for long-term investors. Sector leaders are often able to gain operating leverage and brand cachet, allowing them to outperform peer companies.
Let’s look at the case of Hindustan Unilever (HUL). HUL created Rs. 7,258 crores of wealth during the research period. With a dominant market share in consumer goods, HUL had strong pricing power to increase margins even during slowdowns. Today, HUL is very much a house-hold name and continues to capitalize on its leadership to maintain profitability.
Another example from the study is Bajaj Auto, which also ranked among the top wealth creators. Its leadership in the two-wheeler segment enabled it to easily navigate competition and economic cycles. Take away here for long-term investors: industry leaders tend to outperform.
Peter Lynch, author of One Up on Wall Street, famously quipped: “Go for a business that any idiot can run—because sooner or later, one will.” This quote reinforces the idea that businesses with simple dominant models often perform best over the long term.
Efficiency and Productivity: The Hidden Drivers of Wealth
The second insight, and perhaps one of the more granular from the study, is on efficiency, productivity, and creation of wealth. Companies that improved their return on capital employed (ROCE) and return on equity (ROE) reliably outperformed those companies that did not. One example of this was HDFC in housing finance, which returned over 20% in ROCE to create massive amounts of wealth.
This is what long-term investors should know. What companies are using their capital smartly will form the basis of which companies succeed in the years ahead. The Dupont Analysis used in this study demonstrates how net profit margins, asset turnover, and equity ratios add up to ROE. This analysis can now be employed for consideration of investment opportunities.
Valuation Lessons: The Price You Pay Matters
One of the bright spots of the report is on the valuation in long-term investors’ wealth creation strategies. While many of the wealth creators traded at high price-to-earnings multiples during the 1992-1997 period, the study goes on to add that while companies bought at P/E multiples lower than their sustainable return on equity provided the best returns over time.
Buffett stresses this point really well by saying, “Price is what you pay, value is what you get.” Investors must be always cautious about overpaying even for the best companies. A firm may possess excellent fundamentals, but that doesn’t guarantee that its stock’s price related to its earning is simply acceptable. The investment may prove an underperformer in the long run.
🎯Focus on P/E to growth (PEG) ratios and look for companies that bring you growth at a reasonable price, or GARP. The same rule still applies today.
Never chase growth when you’re hunting for wealth creators in today’s market. Seek value for money. Even a super business, whose stock price may be great may be entirely unrelated to the earnings power of its business, it may fail over the longer term to create wealth for shareholders.
Lessons Current Investors Can Learn from the 1992-1997 Study
It’s two decades since this Motilal Oswal Wealth Creation Study was published. In my view, most of its insights remain extremely valuable. Here are a few quick summaries of the most important lessons:
- Focus on industries with high entry barriers where competition is very limited and sustainability of profit can be assured-for example, in high-tech and healthcare.
- Target market leaders, that is, dominant companies which enjoy economies of scale.
- Review efficiency and productivity metrics such as ROCE and ROE. Seek companies that are not only growing revenue but also utilizing their capital well.
- Be careful about the valuation. A company can be great, but if you’re paying too much for it, it is a bad investment. Seek businesses that deliver growth at an affordable price.
As Warren Buffett once admonished, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” This logic encapsulates the fine line between growth and value that all long-term investors must navigate.
Conclusion: The Wealth Creation Strategies for Long-term Investors
The Motilal Oswal study is based on data from the early 90s but can still be applied today. All one needs to do is apply these principles with a modern twist. If invested in companies with high entry barriers, dominant market position one sets oneself up for long-term success.
While markets change, age-old wealth creation strategies for long-term investors remain same. Grow your wealth today in the markets and keep patience, discipline, and a focus on the fundamentals as that ultimate success tool.
