My top Diwali tips. That too in advance.

Those of you who are regular readers of Contramoney may have guessed that I would retract this claim immediately.

Well, you are half right. I will give you a “tip", just not “tips". So, you, too, eat the humble pie for trying to make a short-term prediction.

So, what is my Diwali tip? I am coming to that.

In fact, I will take you through the entire process of selecting the stock. You see, unlike the gurus on TV, I don’t believe in dishing out advice for free. If you want something, you need to work for it.

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Here’s what I did

First, I decided to ignore all the macro filters. As Warren Buffett and Charlie Munger have often said, getting the macro right is extremely hard. There are just too many variables. So, I just dropped all these filters. For instance, no more of India will grow, so car sales will grow, and therefore, I should buy so and so auto stock. This logic is too generic and too faulty. On a lighter note, if this were true, the Ambassador would still be the top seller in India, and the stock of Hindustan Motors Ltd would be a top performer!

On the contrary, I just focussed on individual companies. After all, that’s what I am getting when I invest.

Second, when deciding on the specific company, I focussed on a few things, some of which were subjective and others that could be measured easily. When it comes to the subjective part, there really is one thing: The integrity and competence of the management to deliver over the long term.

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When it comes to the objective part, among several factors, the key was how efficiently the company was utilizing existing capital and incremental capital. Capital-efficient companies made my shortlist.

I know what you are thinking. Even though the love for loss-making, fast-growing companies has waned, it's still kind of strong. Well, those are trickier to evaluate, so, we will leave that for another Contramoney edition. These do not make my Diwali-to-Diwali cut anyway.

Third, one factor that’s important, and may sound contrary to what I just said a while back, is the size of the opportunity the company is tapping into. In the example above, if an auto stock did pass through all the filters, it would still need to meet this criterion: The potential size of the auto industry and its growth in the years to come. You see, there’s no point trying to buy into a stock where the market opportunity is so limited that there’s not much money to be made, even if the company’s products were a runaway hit.

On the contrary, imagine a well-managed, capital-efficient company gaining market share in a fast-growing industry. These are the kind of tailwinds that can make a company's prospects super exciting over the long term.

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Fourth is the most important point. That’s having the humility to acknowledge many unknowns when it comes to the company selected. This one single realization is perhaps the key to investing success. One can only do so much research and so much digging around. And to account for these unknowns the only thing you can do is try and buy the company's stock at a deep bargain price. Buffett refers to this as the margin of safety, perhaps. This way, even if there is a surprise, you have a buffer to deal with it.

In summation…

I didn’t focus on the macro; I focussed on the company instead.

I filtered companies based on both subjective and objective criteria.

I ensured the size of the opportunity was large and growing.

And then found the stocks that were selling with a high margin of safety.

Yes, investing is simple. But at the same time, it’s not easy. It’s just that we complicate things.

This is the process I followed and found myself a Diwali tip.

Now, I have a dilemma. Do I serve you the fish, or do I leave you with the ideas (above) on how to fish? I am leaning toward the second—leaning hard, in fact.

As a regular reader of Contramoney, you would agree there are no shortcuts in life. And perhaps none at all when it comes to generating wealth from investing in the stock markets.

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It’s a slow ‘happy’ grind, which, if you persist with it for decades, with a discipline that’s uncommon, perhaps you will realize investing success after all. And that’s my Diwali tip for you.

Wish you a very Happy Diwali!

Rahul Goel is a finance and publishing professional with over 25 years of experience in the industry. You can tweet him @rahulgoel477.

You should always consult your investment advisor/wealth manager before making any decisions.