The Golden Thumb Rule | Growth at a reasonable price is my rule; overpaying can destroy returns even in bull markets: Srinivas Rao Ravuri

In this edition of The Golden Thumb Rule, Ravuri emphasises that sustainable wealth creation is not about chasing momentum but about adhering to Growth at a Reasonable Price (GARP).

He cautions that even in a rising market, overpaying for future growth can erode returns and hurt long-term compounding.

Drawing on market data from the past five years — where headline indices doubled but a large share of stocks delivered muted or negative returns — Ravuri underscores the importance of entry price, margin of safety, and disciplined asset allocation.

He also shares practical thumb rules on acceptable PE multiples, navigating market euphoria, and striking the right balance between time in the market and valuation-driven investing. Edited Excerpts –

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Kshitij Anand: If you had to define valuation discipline in one sentence, what would be your golden thumb rule for investors?
Srinivas Rao Ravuri: Our golden rule is Growth at a Reasonable Price, or what we call GARP, which is what we follow at Bajaj Life. Before I dwell deeper into this, I just want to make a point. Given the markets we have seen over the last five years, the Nifty has doubled and delivered about 14% compounded returns.
Ignoring the COVID phase, from Jan 2021 to now, Nifty 500 companies have doubled. But within that, a good 40% of companies — around 200 — have delivered negative returns over these five years when the market has doubled. And about 15% of the companies have delivered very healthy returns.

So, the point I am making is that if you buy at the right price, compounding will automatically work in your favour. But if you overpay and pay today entirely for expected future growth, you can lose money even in a good market.

Kshitij Anand: Why do most investors abandon valuation discipline during bull markets, and what is the thumb rule to avoid that? There is a saying that when everyone is talking about markets and giving tips, that is the time you should actually bail out of the markets.

Srinivas Rao Ravuri: Well, we are investors and we are human beings. And we have emotions. Markets are governed by fear, greed, and, as some people say, career risk. In bull markets, we tend to see people ignoring time-tested principles of investing and valuation metrics like price-to-earnings and start focusing on narratives instead.

In fact, even professional investors go through a relative valuation phase — saying X company is trading at 60 PE and it is cheap because Y company in the same space is trading at 80 PE, so it looks better. I think that is one challenge we face. Another issue is that people believe they will ride the flavour or momentum of the season, citing examples like defence, infrastructure, and real estate. They start thinking this time is different and that these sectors will deliver returns forever. These are things we need to be mindful of.

We are here to make money, and the first principle to keep in mind is: do not lose money.

Kshitij Anand: Coming back to your first point about the right price to buy — what is your thumb rule to decide when a stock is too expensive to buy, regardless of how strong the story is?

Srinivas Rao Ravuri: Here again, I would like to use a simple price-to-earnings metric to determine whether a stock is expensive or not. For a steady-state business, I would say paying 33 times earnings is fine. What is the logic? When we say the price-to-earnings ratio is 33, we are essentially talking about a 3% earnings yield.

For a growth company — and investing in equity is about investing for growth — a 3% earnings yield plus growth is acceptable to me. Within that, for a relatively new business or a new segment where high growth is visible today, maybe you can pay up to 50 PE. Anything more than that raises questions about the margin of safety. That is what I would like to avoid as far as possible.

Kshitij Anand: I understand. In fact, even in new fund offers and IPOs, we see a lot of companies trading at much higher PEs than what you just highlighted as a benchmark. Any word of advice or caution for investors there?

Srinivas Rao Ravuri: Absolutely. I think what we need to keep in mind is that high-quality companies can also be poor investments if bought at the wrong price. As I mentioned earlier, we are already seeing that happen. The first principle is avoiding big mistakes.

Companies in new-age sectors, catering to evolving markets and demonstrating long-term growth potential, tend to trade at premium valuations. But what is important is sustainability and also keeping in mind the concept of mean reversion.

Kshitij Anand: Now, let me also ask — investors do end up buying stocks that may be available or trading at a premium valuation. It does happen. So, what is your thumb rule on paying a premium valuation? When can we say it is justified, and when is it dangerous?

Srinivas Rao Ravuri: When there is a long-term reinvestment runway — meaning the durability of business growth and earnings growth is visible — I do not mind paying a premium. Let us say there are companies addressing a large market, with a unique business proposition and superior management. That, in turn, means the company can deliver.

If you look at the last 10 years, the Nifty has delivered around 15% earnings growth. But here is a company that, given all these positives, is likely to deliver double that earnings growth. In such a case, I may have to pay a higher price. However, what we need to keep in mind is whether this growth is seasonal, cyclical, or much more long-lasting. If it is cyclical, we should be extremely mindful of paying a high price.

Kshitij Anand: And how should investors think about valuation in high-growth stocks? What is the golden thumb rule to avoid overpaying for growth?

Srinivas Rao Ravuri: First, focus on the business model — whether the underlying business has the potential to deliver sustainable long-term growth. Even if it does, it is important to remember that we cannot be masters of everything. I am a professional investor, and even then, we are not here to capture every possible upside from every possible company. Understanding the company and knowing what we are good at is important.

Focusing on the margin of safety is an essential part of risk management. A company may look great on the surface, and you may see brokerages, media, and everyone talking about how great the business is. But ultimately, valuations are paramount. As I said earlier, keeping it simple — paying more than 50 PE means you are extrapolating current growth for many years ahead, and your returns may end up depending more on PE expansion than on earnings growth.

Kshitij Anand: During times of euphoria — especially post-2020, when markets saw a strong rally and SIP contributions rose sharply to around ₹31,000 crore — many investors started investing aggressively. For someone investing in individual stocks, what is the thumb rule for valuation during such euphoric phases? Should one buy less, hold tight, stay out, or wait for dips? What would be your advice?

Srinivas Rao Ravuri: The first thing to focus on, even more than stocks, is asset allocation. What percentage of your savings or surplus are you allocating to each asset class? I have seen people debating very passionately about a particular stock or equity mutual fund, while only 5% of their surplus is actually invested in equities.

Asset allocation is the starting point. That is where investors should seek expert advice from financial advisors to determine their risk appetite and decide what percentage of their money should go into each asset class.

Second, during euphoric times, it is important to reduce exposure to equities and increase allocation to fixed income. Within equities, what we do at Bajaj Life is gradually shift portfolios from high-PE, cyclical companies to more stable businesses, such as utilities, and increase the overall quality of the portfolio.

So, first, adjust at the asset-class level. Second, within equities, move toward relatively safer and less volatile sectors and stocks. That is what we believe investors should do.

Kshitij Anand: And for long-term investors, is valuation about entry price or time in the market? What is the golden balance rule there?

Srinivas Rao Ravuri: I would say time in the market builds wealth, but the entry price determines how well it compounds. Staying invested is essential, but valuation defines the starting yield on capital. To that extent, a good entry point with a margin of safety reduces your downside risk. Our approach is to own businesses that generate sustainable growth, but to enter them thoughtfully.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)