Does Buying Expensive Quality Stocks Work?

Lessons from the original Nifty 50

This post first appeared on capitalmind.in

It’s the 1960s. New investors join the markets in droves. The number of shareholders crosses a landmark number for the first time in history. 

Most of these new investors flock to mutual funds.  Assets under Management, having grown 7x in the last decade, are on track to grow more than 3x.

star fund manager breaks away from the firm that he helped make the face of the mutual fund industry to start his own. His NFO seeks to raise $25M, an ambitious amount for the time. He plans to charge as much as 8% in entry loads. Yes, that’s not missing a decimal. 

He receives $247M (over $3B in today’s terms) to manage. That is an equivalent of Rs. 21,000 cr. in a new fund offer today. Just the entry load would have justified all of HDFC AMC’s crazy valuation.

The total number of funds breaches 200 for the first time. Fund Managers acquire rock-star status. One is even featured on the cover of TIME magazine. 

As these fund managers seek out opportunities, a specific set of companies with proven track records and consistent dividend growth start to get more notice. Most of them are household brands. High-Quality Franchises with strong balance sheets in a surging economy. 

They trade at 50x-60x-70x earnings. But they are high Return on Capital businesses, with tremendous runway for growth. You can’t go wrong.

They come to be called “One Decision stocks”. You only buy. You never sell. And not for measly low double-digit gains. 

“Expensive High Quality” pays off.

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