Just finished reading the book 'India's Money Monarch'. Learning about how India's stock market wizards thinks is just amazing.
India's Money Monarchs book is not available as a physical copy on Amazon but you can get free Kindle version if you are a subscriber.
In this blog I will just share the key excerpts from the interview with Indian market legend 'Rakesh Jhunjhunwala' that is his thought-process in the year 2005.
About Rakesh Jhunjhunwala (RJ):
I am sure everyone would have heard of his name. As of today(11.03.2022), his net worth stands at $5.9Bn (₹44,250cr).
Rakesh Jhunjhuwala manages only his own money. He is well known to have both investor and trader mindset which has helped him reach where he is today.
I also have written a blog on his mentor, Radha Kishan Damani, which you can read below:
RJ says most of the things he has learnt by trial and error.
'I have made lot of mistakes, far more than people know. But the only comfort I have is that I learn.'
He never lends but borrow to invest. He quotes 'I am a risk taker by nature and I am bullish on the Indian Stock market. I am always in debt and I pay interest.'
Over time he has started to be less trusting about people and be aware of the fact that people do not change. He says in the context of management showing lot of positive intent and enthusiasm but their past action do not show the same.
According to him ," We as investors need to realize that we know the price of everything but the value of nothing." He constantly try to determine the value of something which is far lower than the perceived value
He invests when he thinks that there is substantial margin of safety. He do not put much importance for growth. According to him growth is just one of the factor of valuation. He looks at an investment opportunity where he feels that the capital is safe and the possible upside is very large.
On his investment philosophy, RJ says "Investment has to be a broad decision. It it NOT A MATHEMATICAL DECISION. Investment is wisdom and not intellect. It is broad understanding and not analysis. Closely interacting with the company's management could prejudice your judgement."
He adds, Investing CAN'T be taught, it has to be learnt. Also, one needs to think like a businessman.
He believes in invest now, investigate later. When he see the basic value in a stock, he invest immediately.
RJ in the interview shares his thought process followed for investment, but they are not hard and fast and he is quite flexible in his approach.
When he analyze any company, he look at 4 things:
External market opportunity i.e. the market size: Citing an example, he said Infosys would not have been such a great company had not been for the explosive growth in information technology sector.
Competitive ability of the company: In order to take advantage of the market opportunity.
Scalability: Companies do not necessarily grow when they become bigger. Therefore, scalability in the company's business model is very important.
Integrity of the management
Valuations: One needs to look at both absolute and relative valuation.
On elaborating on his thought about valuation, He says although he looks at these factors, but sometime he invests when all the above criteria are not present. Example would be his investment decision to buy McDowell at ₹20. There was great external opportunity. Everything was negative about the company but the valuation had factored everything in.
Valuation should be the first priority before everything else. It is not what you buy but what price you buy. When stocks become overvalued there is little logic in holding on to them.
Valuation also helps in determining the holding period which is not very hard and fast for him. When he feels that the investments are adequately valued, he exits regardless of how long he have held the shares. Since he invest for himself, so it gives him the ability to be flexible. He held ACC for 14 months and sold it and certain investment he continues to hold till today.
Rakesh Jhunjhunwala has made a fortune trading in the market. He says "I have made a lot of money by shorting stocks. You make money by shorting when stocks are incidentally overvalued. To avoid losses, you need to keep a reasonable stop loss."
Just like investing, trading has to be learnt, it can not be taught.
When shorting, he would short the market and not specific stocks. And to get your timing right you have to be on the spot. You have to realize when the play is over. Implying you need to keenly follow the market.
About Market Cycles:
Market booms and dooms are created by a set of economic conditions. The market always tend to exaggerate these circumstances. But eventually they return to mean.
The history of market tells us that markets and economics never change. Right from the south sea bubble to the internet boom, markets have followed a course. So, one needs to take advantage of such situations.
India is on the threshold of a fundamental, structural and secular growth phase.(Just to be clear that the interview took place in 2005).
Indians are skilled people and the fact that we undertook liberalization along with we being very tolerant as a part of Indian culture bodes well for the fact that with developments like the irrelevance of geography, has allowed Indian Skill sets to be utilized at inter-continental level.
With Indian culture being tolerant helps us being more receptive to changes and technology.
India is also a savings oriented society. This makes capital available for both investment into businesses as well as in the stock market. The growth that is taking place in India(2005) is far more solid than people are recognizing.
He believed that it is inevitable that everything is going to be privatized eventually.
RJ on then finance minister 'Manmohan Singh':
In a country like India, with household saving of 25% of GDP, you do not have even 2% of the those savings coming into the market. It is reasonable to expect 5% of savings coming into the stock market. When that happens, question will "Where are the shares?" You can't create companies overnight. Also, There is a shift of mutual fund industry from being state controlled to private hands. This shift is leading to great efficiencies and competition.
With reduction in interest rate, the consumer demand will get big boosted. It will also facilitate infrastructural and investment demand.
In an inflationary country like India, a Maruti 800 in that year sold for a price which is lower than its introductory price 10-12 years ago. Because of efficiency, the company has brought the cost of production despite increase in raw material cost. This is valid for almost all of Indian companies.
India has achieved dematerialization in the fastest time possible in the world.
Entry barriers are very critical in pharma. Access to developed markets are quite difficult. To add to that, Indian companies are quite cost competitive. Pharma manufacturing is a qualified or skilled labour intensive job. He feels that India is going to be very big centre for doing contract manufacturing and research. India is going to be a very big sourcing base.
Also, the demand for Pharma in developed markets is inelastic. It is a fact that a rupee spent research in India is equal to 6 rupee spent in US. Indian pharma companies will also reach a stage where they will be full-fledged new chemical entity companies which have a market worldwide.
Some other pointers:
I believe it is inevitable that everything is going to be privatized eventually.
Asian growth is up to 3x more sensitive to commodities than the European or American growth. He believes there will be a sustainable growth in commodity demand over next 5 years. As population in developing economies consume more goods rather than services.