The Wealth Creation Study: Lessons from a Motilal Oswal’s 1996 Inquire 100 Study.

Today, we start an amazing series on how wealth is created in the stock market. We kick off a very deep exploration of a Influential work written in 1996 by Ramdeo Agrawal of Motilal Oswal. It’s an old work, but its insights are priceless and always available to learn for today’s investors. So, buckle up-it’s going to change your investment philosophy! We will explore every case study done by him. Every credits in this and future post of this series goes to them!

The Wealth Creation Study

Coming back to 1996, the Indian stock market was pretty infantile compared to today. So, it was a quest for Raamdeo Agrawal during that period: What makes a company a great wealth creator? This was not just academic inquisitiveness; it was a search for the DNA of successful companies that provided sustained rewards to shareholders.

The Methodology

Agrawal and his team identified the top 100 wealth creators in the Indian stock market from 1991 to 1996. These companies, now known as the “Inquire 100,” had more than quadrupled their market capitalization during this period, considering dilutions when available. That’s a compound annual growth rate (CAGR) of 32% or higher!

Key takeaway’s:

Wealth Creation Study– The Mid-Cap Croppers

One of the stunning findings from this study is that mid-cap stocks have a better propensity toward creating wealth more quickly than those blue-chip heavyweights. This resonates well with the ideology of one of the greatest ever investors, Peter Lynch, who always promoted finding “hidden gems” in the market.

This is True even today but requires more caution on the part of investors. The mid-cap space has become far better manned; finding hidden treasures is a hundred times more arduous than before.

Wealth Creation Study: ROE Matters

There is a very strong correlation found between high ROE and wealth creation. Companies within the Inquire 100 would have ROE that would be significantly higher than the average market.

The results really resonate with Buffett’s investment philosophy.

“The ideal business to own is one that can consistently invest significant amounts of additional capital over time while achieving high rates of return.”

–Buffett

Wealth Creation Study: Focus Beats Diversification:

An impressive 87% of the wealth creators were single-mindedly focused on their core businesses rather than being diversified conglomerates.

In todays fast-changing business scenario, this principle stands very relevant today. Companies that remain laser focused on their core competencies, more often than not, outperform those that spread themselves too thin.

Wealth Creation Study: Growth Isn’t Everything

Amazingly, this study concluded that moderate sales growth of 10 to 30% CAGR was sufficient for significant wealth creation; what mattered was more the way companies managed their costs and leveraged their assets.

This finding exactly aligns with Munger’s stressing operational efficiency.

“A strong business at a reasonable price is better than an average business at an excellent price.”

–Charlie Munger

Wealth Creation Study: Tax-P/E Ratio Link

One of the most interesting findings of the study was the positive relationship between tax paid and P/E of a firm. Sometimes, more taxes paid translated to a higher valuation.

Some people would say that this is unintuitive, but it is actually reflecting the market’s preference for good, sustainable earnings of high quality. This is even true in today’s increasing scrutiny on corporate tax practices.

Capital Allocation Matters

Through the study, it is shown that prosperity wealth creators operate under conservative dividend payout policies, with confidence in reinvesting into the business. This happens to conform to the compounding principle that has made Warren Buffett one of the wealthiest individuals in this world.

Bringing It All Together:

Although the research is now nearly three decades old, the basic principles are remarkably still valid. The formula for wealth creation is located in companies possessing:

• Solid return on equity
• Easy business models
• Operated efficiently
• Wise allocation of capital
• Quality and sustainable earnings

However, it is always remembered that past performance is a terrible predictor of future outcomes. So many things in business have changed since 1996, such as technological disruption, changes in consumer behaviors, and global economic shifts restructuring industries.

As modern investors, we have to adapt these time-trusted principles in our present reality. This involves, among other things:

• Trying to look beyond the traditional financial metrics in appraising a company’s competitive moat in the age of digital disruption
• Considering those influences that foster the above, such as environmental, social, and governance (ESG) issues-which are increasingly deemed important
• Creating awareness of the global macroeconomic trends that can even affect the strongest businesses.

We will go on in our next post of this series to discuss how these principles have proved sustainable over time, and then get intimately close with example case studies of companies that have successfully managed to generate shareholder wealth.

Conclusion:

The 1996 Motilal Oswal study provides a framework for identifying potential wealth creators. These insights combined with modern investment wisdom, allied with a deep understanding of the business models today, can fine-tune the investment strategies for the 21st century.

Great investing is as much art as science: one needs to continue learning, adapt to change, and possess a healthy dose of humility. As the great John Templeton so famously said, “The only investors who shouldn’t diversify are those who are right 100% of the time.”

I couldn’t include graphs because they weren’t available, so this is the first post in the case study analysis. It will improve over time. I encourage you to stay until the end if you want to learn more. It eventually gets much better, I cant myself with that!

Stay tuned for next post.

Read this to get insight’s from the Berkshire Hathaway annual shareholder letters!

Until then pour your wisdom in comments because its free!