26 Sep 2015

Rakesh Jhunjhunwala Interview Summary

Rakesh Jhunjhunwala is one of India’s renowned investor who has built a fortune from scratch over last three decades. He was interviewed on his life, his investing style, his views on market etc by Ramesh Damani in a show hosted on CNBC TV18 called ‘Wizards of Dalal Street’.
Following is a summary of the interview:

Early years in the stock market:
Born in 1960, and he first dabbled in the markets when he was aged 15 years. He was interested in markets due to daily fluctuations in stock prices and due to investments in markets by his father. When Rakesh decided to make a career in investing by being a broker, he was instructed by his father that he can go ahead, provided he fulfilled a few conditions – a) don’t go to any of his father’s friends for money, b) don’t ask him (Rakesh’ss father) for any money and c) that Rakesh should always keep his promises

He started investing in 1985 by borrowing Rs.750,000 @18% to 24% interest from two people. He subsequently earned Rs.8-10 lakhs on this capital over next three years. He then brought shares in a utility company, where the dividend yield was closer to the interest he paid on borrowed capital. The reason was that there was an expectation of an increase in its guaranteed RoE, which could be linked to its power generation efficiency. He always invested based on company fundamentals and did not speculate in his early years in the stock market.

Over the first four-five years he just waited patiently for making capital but could not make enough of it. He then decided that he had to earn his initial capital which can be only be done by trading. Then he decided to invest a large sum in an iron ore mining company based on advice from Mr.Bajaj. The iron ore prices were climbing and earnings could rise significantly. The stock went up 3x subsequently.
His idea is not being contrarian for the sake of being contrarian. He is neither a optimist nor a pessimist, but a realist.
He cites an example of 1990 period when VP Singh was the PM and Madhu Dandwate was FM. The market expectation was that the FM would present a socialist budget and would be anti capitalist. This resulted in a hugely bearish sentiment in the market, to which Rakesh took a contrarian stand. He accumulated a bullish position and made a killing when the budget was against market expectations.
Rakesh also made a practice of reading the Union budget fine print to understand the budget. He cites an example of taking a profitable position in IDBI, which got significant sops in budget, which were only included in the fine print. He then earned significantly both on long side and short side in a leading cement company in 1991-1992.
Key investors who influenced early investment style were Radhakishan Damani, Kamal Kabra, Amitabh Jhunjhunwala and Ramesh Damani.
According to him Trading / Speculation teaches a person to accept reality as it is. He believed that markets are supreme and always do the right things in the end.
Another learning in 1991-92. Never sell purely on fundamentals. Also sell looking at market conditions (technical factors).

PSU Stocks bet:
In 2000, tech stocks were trading at more than 100x P/E, everyone was bullish. However, Rakesh sold almost 80% of his tech stocks and he was bullish on PSU stocks, due to very low valuations and possible privatization expectations. Also supporting the PSU call were superior earnings quality and strong growth track record of this set.
To invest, one has to be an eternal optimist. Key factors behind optimism in 2003 in the Indian markets were that earnings had doubled, quality of earnings was superior, yet markets had not gone anywhere in one decade.

Pharmaceutical Sector bets:
Rakesh’s Pharmaceutical investments were influenced by Arvind Joshi and Ashwin Kedia. Post a presentation by Arvind, he found that these companies were trading at attractive valuations considering their growth prospects. One of his tenants is that when you find an attractive idea, bet big. He did the same in Pharma sector.

Investment Philosophy:
What to look for in analyzing a company – Like judging the beauty in a girl and value in a stock - you need to look at all aspects to judge which one is attractive. But the most important factor in buying a stock is its price and valuation. Always do a risk-reward analysis of possibilities. Invest in only what you can comprehend. Generally invest money in any stock very slowly. Rakesh first invests a small sum and then studies the company. If he is convinced about the risk-reward, then he buys more and so on. According to him, the most important aspect in an investment –after price - is the size of external opportunity. Key building blocks of any good investment are the business’s size of opportunity, competitive advantage, scalability, management integrity and most importantly valuation.
He believes in diversification within concentration. He had a portfolio of 25 stocks, in which top 10 comprise of 2/3rd of his portfolio. All the top 10 stocks are in different industries.
Investing is the most interesting profession in the world due to the kind of understanding, introspection, breadth of knowledge that is required is huge.

Key Influencers:
He is influenced the most by Marc Faber and Warren Buffett.
Key learning from Marc Faber are –
a) Look at things unemotionally,
b) don’t forget the teachings of history,
c) don’t participate in market excesses to make a quick buck.

Key learning from Warren Buffett are –
a) Invest in a business and not a stock,
b) Give importance to quality of business, sustainability of growth
c) Valuation at which you are buying the business,
d) Importance of management.

Advice to a novice investor joining the market –
a) Have an independent opinion, b) read a lot, c) have an open mind, d) draw your own conclusion, e) means are more important than the ends and f) believe in the superiority of the markets.  
In markets when time changes, everything changes. If time changes, copper can turn into gold, and even gold can turn into copper. Experience and maturity are great teachers.

An experience that taught him the most:
When Rakesh invested in private equity in 1999-2000, he learned more than he earned. Key learning were a) Size matters in a business. It is difficult to scale small businesses to large size, hence larger companies are much more safer than smaller ones.
b) A bird in hand is worth two in the bush.

How to deal with loss:
Inspired by this quote - You have to lose many battles to win a war – by Winston Churchill. He never bets more than 2-3% of capital in any bet. Even if he loses, he learns the lessons from mistakes and moves on. It’s a part of a larger game.

Thoughts on Charity:
He wants to support following causes –
a) Orphanage for 500 children
b) Study how the state spends on social welfare and recommend best practices to optimize the impact of that spend, and
c) Study ancient water management systems and apply them to rural and urban areas.

Plans for RARE Enterprises:

Wants to institutionalize his investing skills, as he wants it to stay beyond his life. He is in the process of building an organization in RARE Enterprises. According to him to build an organization, one has to be able to accept other people’s mistakes, accept that other people can be right and he can be wrong and encourage employees to take independent decisions. He wants to build an organization that focuses on trading and investing.

Video of the Interview:
You can watch the entire video of the interview here

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