Warren Buffett was once quizzed about the advice he would give to young investors starting out. The interviewer asked: “Where should they start?”

Buffett: “Do what I did 40 years ago, and begin studying every public company in the United States”.

Interviewer: “But there’s 27,000 public companies”.

Buffett: “Well, start with the ‘A’s”.

When he left medicine to become a full-time investor in Indian equities, Dr Vijay Malik remembered this exchange. But instead of going about it in alphabetical order, he began studying Indian companies with the largest market capitalization.

He read the About Us section on hundreds of company websites, plus the Products and Services section. Then he used tools from the Indian website Screener to compile the last 10 years of each company’s financial performance. This data was turned into a spreadsheet.

From this data it wasn’t hard to see the companies which had fundamental strengths in their business models: steady profits, cash generating, use of cash to meet expenditure requirements, surplus cash flow.

Any companies not meeting these tests could be instantly disregarded. What Malik was left with was a core of equities that were worth investing in. This is what he found...

There’s a shortage of large-cap Indian equities. Only Tata and Reliance are worth over $100 billion. For every other company, owning even 1 percent of it would mean that if you try to sell, it will affect the price (called impact cost).

The result: there’s too much money chasing too few big companies in India. And that means their valuations are ridiculous. Yet any time there’s an issue with global liquidity, it will affect the price of these large caps.