Buy Stocks When They Are Cheap: Ramesh Damani

Ramesh Damani who made his millions from the stock market has sent out a powerful reminder that the best time to buy stocks is when there is bad news all around and stock prices are cheap.

Ramesh Damani (popularly known as the “Nawab” of Dalal Street) made millions from the stock market with a number of multi-baggers in his portfolio. Ramesh Damani is happy to share his tips on how to buy stocks to anyone who is willing to listen.

Speaking to CNBC-TV-18, Ramesh Damani said “Cheap equity prices and good news don’t go hand in hand, but equities will create wealth over the long term“.

Ramesh Damani cited the example of the year 2002-03 when there was so much pessimism in India and the BSE Sensex was languishing at 3,000. Nobody wanted to buy stocks at that time. But the few investors who braved the situation and bought stocks in that period became millionaires and the proud owners of multi-bagger stocks because just a few years later, there was a massive bull run and the index soared to 18,000.

The irony is that investors who were loath to buy stocks at 3000 were thronging the stock market and falling over each other to buy stocks at 18,000, Ramesh Damani said.

Ramesh Damani explained that the reason for this irrational behaviour amongst investors was because their expectations were unrealistic. If investors see one year where the stock market gives a return of 20%, they get very excited and expect that every year will see a return of 20%. If that does not happen, as it cannot, investors get very disappointed. If the stock markets see a loss of 20%, then investors go to the other extreme and get so disillusioned that they expect that every year will see a loss. Then they swear off stocks till the next raging bull market when they blindly plunge in.

Ramesh Damani explained that investors had to condition their minds to accept that “bad news” was actually a very good thing for them because they were able to buy top-quality stocks at a bargain price. He pointed out that when the economic environment was good such as that the industrial production was up and there was good policy action and the rupee was strengthening etc, the stock prices would be at a premium. When the new is bad, the stock prices are cheap and that is the time to buy if investors want to make money, Ramesh Damani emphasized.

Ramesh Damani advised that investors should take their mind off the market aggregate and look at individual stocks. As an illustration, he cited stocks like Hindustan Lever, VST, ITC, Titan & Page Industries which despite all the gloom and doom were are at their all-time highs.

Ramesh Damani also suggested that investors should develop a “portfolio” or “basket” approach. Instead of getting obsessed with the performance of one stock and getting ecstatic or depreseed by it, investors should look at their entire portfolio and take a balanced approach.

As a stock-picking strategy, Ramesh Damani advised investors to buy a business that they know and trust. He gave the example of Godrej Industries. The soaps made by Godrej are very popular and used by everybody; yet investors don’t pay attention to the stock. They don’t realize that a company whose product they trust blindly has gone up 50 times in the last 10 years. There were many such great companies in India that go up and build wealth over a period of time, paying dividends, Ramesh Damani emphasized.

He advised that as a rule of thumb, investors should buy stocks of companies that had free cash flows and avoid those with huge cash requirements. He explained it as a “very simple concept” that if a company earned Rs 100 can distributed Rs 80 as dividend, it was a “fabulous company” because it means that the investor was getting his money back in terms of dividend. He said these companies had “negative working capital” because they received funds in advance from their dealers and customers.

As an anti-thesis to free-cash-flow generating companies, Ramesh Damani cited the example of infrastructure companies and hotels which had huge requirements of cash in view of the nature of their capital intensive business.

In giving this precious advice, Ramesh Damani reminds one of Warren Buffett who also gently reminded investors that they should be cheerful of falling stock market prices because they can buy more.