Some comments from my side. I will try to use ValuePickr Portfolio companies as examples. See if these help.
1). Balkrishna, Suprajit, Gujarat Reclaim - are all well-managed manufacturing companies. With strong, capable managements that have demonstrated great long term record. However these are what I would call Category B businesses. There iscyclicality in demand, some years are pretty good, some years are tough, margins do come under pressure. Overall things sort of even out decently achieving kind of 20-25% CAGR growth. But if you think about it, visibility is poor beyond the near-to-medium term.
Think about how Mr Market prices these kind of companies.
2). Then there are what I would call Category A businesses. These are much more predictable. Size of opportunity is big. Demand visibility remains strong, you don't see a pattern of cyclicality and you CAN see them clocking higher growth rates for a number of years into the future. Mayur and Astral may fall into this category.
Think about how Mr Market prices these kind of businesses. Is there a discernible difference in business quality between these 2 categories?
3). Then there are Category A+ businesses. There is significant intellectual property involved. Once a certain size/profitability is reached and you have a decent track record established, usually these kind of companies go from strength to strength. Can you see an Ajanta Pharma or a Poly Medicure there. Perhaps a Kaveri Seed Company can reach there??
How does Mr Market usually price these kind of companies??
How are the odds of business performance stacked for these companies??If you can see that difference clearly - that shouldgive you some clues to differentiating among these businesses. And therefore buy, hold or sell clues too! if you can say whether Mr Market is NOW (12 months forward, 24 months forward) valuing them cheaply, fairly or richly - w.r.t. that future picture. That ofcourse is an ART form - the more stronger that picture for you, the more parallels you can cite from studying Mr Market's preferences, the more businesses/stocks you get familiar with - the better will be that Feel.
Having said all that, you would also do very decently with a 25%+ CAGR from staying put in strong Category B businesses like the ones cited above. Nothing wrong with that.
But those that you CAN categorise into higher categories - are perhaps businesses where you think the ODDs are much better - for much stronger sustained performance. That's a CALL you are taking!You may be wrong in that one or the other call. But Capital Allocation is all about becoming clearer and clearer about why you should allocate more capital to A than B.
We can only know by sticking our neck out - and taking that Call. We would not like to be ambivalent about all our portfolio stocks. Every 6 months we want to take that Capital Allocation Call - where should we allocate more of our Capital and Why - we look to learn from both our mistakes and our successes.
Senior ValuePickrs with a consistent track record are polled by Admin, against our Capital Allocation framework, before putting out the Reccos. There are different voices too, but someone does need to take a Call:)