19 Feb Market Veteran Ramesh Damani offers a formula to make a billion from stocks.

Dalal Street veteran Ramesh Damani says investors should have a target to double their money every three years if they want to create phenomenal wealth from the stock market. “If one can achieve this goal, an investment of Rs 10 lakh can become Rs 100 crore in a 30-year career in stock market. The initial investment would surge 10 times, or 1,000 per cent,” Damani said the concept of doubling money is simple; you need to grow at a CAGR of 24 per cent to double your money every three years. This, Damani feels, can be achieved by using the “principle of compounding.” Great businesses can effortlessly deliver such returns over a long time, says he. “Great businesses compound over time, compounding your wealth over time. The trick to get wealthy is to double your money every three years. That should be the benchmark. Great businesses can last various market cycles to build great franchises. They have great managements and pricing power. They outlive market cycles because human habits don’t change,” Damani said. He advised investors to learn the principle of compounding, which can lead to financial liberation. “Compounding can be successful only if one starts investing at a very young age and do so for a long time, which will help grow your wealth into a large corpus. Even a small amount invested early can make a huge difference 20-30 years down the road,” he said.
Have a ‘circle of competence’
Damani advised young investors to have a circle of competence and feels they should try to invest in a sector they understand well and have some knowledge about. “There are 5,000 stocks that trade on any given day on BSE. Try and find a sector that is competitive. If you are a banker, look at banking stocks. If you’re a medical practitioner, look at stocks in the pharmaceutical world,” he said. According to Damani, there is no use investing in those sectors just because others are investing in them but about which one has no idea. Giving his own example, he said when he came back from the US, he had a good understanding of the technology sector. So he invested heavily in technology companies and got rewarded handsomely.
Tricks to find multibaggers
Damani says in order to find multibaggers, it is essential to calculate the value of a company. This can be done by first deducing the market capitalisation of the company by multiplying the number of outstanding shares by the share price. The difference between this market capitalisation and the value addition of the business can give the value of the company. “Infosys IPO had raised only Rs 50 crore. Now it has become Rs 3 lakh crore. Once you find the true value (of a business), it will be easy to bet on its future,” he said. Damani feels it is essential to gauge the growth prospects of a company and triggers that can lead to its growth. Giving example of the typewriter business, he said no matter how much one invests in this business, its stocks will remain cheap as it doesn’t have a trigger for growth. On the other hand, media industry’s digitisation has triggered growth prospects and huge value in cybersecurity, as there is a huge trend of people trying to protect themselves.
Think ‘Out of the Box’
Damani says in order to create great wealth, investors need to think differently and stand against the herd. Coming up with different ideas and thinking out of the box can lead to superior investments. Following the crowd is unlikely to help investors earn big bucks. So the idea should always be to keep the thinking cap on. Conventional stocks become obsolete after a period and a new thought process can be advantageous in finding a new generation of stocks that may do well in the future. “There always is change in trends that gives huge profit in the stock market. Earlier companies like Grasim, Bombay Dyeing gave good returns. Then came technology stocks like TCS, Infosys. But stocks that will give huge returns will be from different sectors. Key is to identify them early,” he said.
Aggressively invest in a ‘great stock’
According to Damani in order to become successful, it is important to think big as an investor can’t become rich by making only Rs 5,000 or Rs 10,000 in the stock market. Damani feels finding a great stock is rare and if an investor finds one, he should invest in it aggressively. “The trick is when you find a great stock, when you find this great value is to back up your truck, buy a truckload of that stock because when that does well, that’s when you would become seriously rich. So if you want to become Warren Buffett, you need to be able to back up the truck and bet high on your conviction,” he said.
Invest for long-term to earn big bucks
Damani said in order to earn big bucks, one should invest for the long term and not depend on short-term trading. Damani says investors who enjoy trading should have two different accounts; one for trading and one for investment. The investment account should be used for wealth creation while trading account should be used for enjoyment and thrill.

Key takeaways from this Article:

1. We should have a target to double our money every three years if we want to create phenomenal wealth from the stock market.
2. If you could double your money every three years then you will create wealth almost 1000 times of your initial investment. For example 10 Lakh would become 100 Cr in 30 years @25% yearly compounding.
3. Great businesses compound over time, compounding your wealth over time. Great businesses can last various market cycles to build great franchises. They have great managements and pricing power.
4. He advised investors to learn the principle of compounding, which can lead to financial liberation. “Compounding can be successful only if one starts investing at a very young age and do so for a long time, which will help grow your wealth into a large corpus.
5. Circle of competence: Investors to have a circle of competence and feels they should try to invest in a sector they understand well and have some knowledge about.
6. Think ‘Out of the Box’ : to create great wealth, investors need to think differently and stand against the herd.
7. Aggressively invest in a ‘great stock: finding a great stock is rare and if an investor finds one, he should invest in it aggressively. “The trick is when you find a great stock, when you find this great value is to back up your truck, buy a truckload of that stock because when that does well, that’s when you would become seriously rich. So if you want to become Warren Buffett, you need to be able to back up the truck and bet high on your conviction,”
8. Invest for long-term to earn big bucks : in order to earn big bucks, one should invest for the long term and not depend on short-term trading. Investors who enjoy trading should have two different accounts; one for trading and one for investment. The investment account should be used for wealth creation while trading account should be used for enjoyment and thrill.

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