In search of the Sangam

Prayagraj [earlier Allahabad] is the city where the 3 holy rivers Ganga, Jamuna and Saraswati meet and their confluence is the 'Sangam'.

Where is the Sangam in the field of investing?  

Go no far. Read what Buffett wrote in 1992 in the Berkshire Shareholder Letter:

"Leaving the question of price aside, the best business to own is one that, over an extended period, can employ large amounts of incremental capital at very high rates of return."

This is the trifecta which one should be looking for. True 30 years back, true today and will be true 30 years later. It's simple to read and understand but takes a lifetime to internalise and practice.

While thinking about this topic, analogy of a fruit bearing tree comes to mind. Compare a fruit bearing tree with a business. The roots of a tree are similar to the moat/competitive advantages of a business. Only if the roots are strong, will they hold the tree against natural adversities like droughts and storms. Roots provide longevity to a tree. Same way, only if a business has strong competitive advantages, will it hold fort against economic headwinds, competition and the like.

Next, fruits of a tree are akin to the ROCE [Return on Capital Employed] of a business. What good would a tree be if its roots are strong but it doesn't bear fruits? So, a good tree should have strong roots and should produce bountiful fruits. Similarly, a good business should have a strong moat which should reflect in healthy returns on capital.

Last in the trifecta is growth. A good tree should have strong roots, bountiful fruits and should have fruits with healthy seeds which can be planted elsewhere to compound into more trees. Similarly, a good business should have a strong moat, healthy returns on capital and the opportunity size large enough to continually deploy the incremental capital at good rates of return.

The confluence of these 3 is the Sangam of Investing. It produces the proverbial nectar, compounding of wealth and leads to investment nirvana.

There are many different ways to invest sensibly. Here, I am talking about investing in good quality businesses which I personally practice.