Rakesh Jhunjhunwala is the most successful investor that you are ever likely to meet in your entire life. He single-handed converted a paltry sum of Rs. 50,000 into a massive fortune of Rs. 7,000 crore. The best part is that he is always willing to share his techniques with us, his fans.
In a chat with Kalpraj Dharmashi of ValueQuest, Rakesh Jhunjhunwala has analyzed why we fail as investors and what we can do to rectify that. I have distilled his advice into a few actionable points:
(i) Invest in stocks the way you invest in property or gold:
When we buy a plot of land, a flat or a chunk of gold, we are happy to sit on it for years, content in the knowledge that the investment will grow steadily with time. We don’t have the urge to periodically check whether the market value is up or down.
However, in the case of stocks, even though we know that they are of fundamentally strong businesses and will stay so for a long period of time, we cannot resist the impulse to keep checking whether the stock is up or down and of reacting accordingly. If the stock price plunges, we get jittery and wonder whether we have made a mistake in buying the stock.
Rakesh Jhunjhunwala suggested that we should not buy a stock unless we are absolutely sure of what we are getting into. And having bought it, we should not get swayed by temporary events if the long-term story of the stock is intact.
At this stage, we must also recollect the superb point made by Raamdeo Agrawal that though the Sensex has given 100x returns, very few investors have a 100x gain in their portfolio owing to their penchant to churn their portfolio.
(ii) Our expectation from stocks is unrealistic:
The Badshah recited an amusing anecdote to emphasize his point. A pretty girl once asked him for a stock pick and its price target. The Badshah obliged by recommending a top-quality stock and assured her that the stock would double in three years (a CAGR of 26%). However, the girl reacted with disappointment. “Only double in three years?” she exclaimed much to the Badshah’s chagrin.
The Badshah explained that we suffer from an unrealistic expectation to become rich overnight and this induces us to shun sound companies and instead choose stocks of dubious pedigree in the lust to make a quick buck.
Giving his own example, Rakesh Jhunjhunwala explained that if he is able to make 18% return on his portfolio, he feels like a “king”. “If I can make 24%, I feel like an emperor” he exclaimed much to the amusement of the distinguished audience.
“Remember that even the World’s greatest investor (Warren Buffett) has compounded his wealth at only 22% CAGR” the Oracle of Mumbai added.
(iii) Understand the difference between “investment” and “speculation”:
Rakesh Jhunjhunwala hit the nail on the head when he said that we imagine ourselves to be ‘investors’ when we are at heart ‘punters’ looking for quick-fire gains.
He explained that we buy a stock without adequate research or conviction in the hope that a short-term event will send it spurting up. When that doesn’t happen, we lug the stock around and pretend it is an ‘investment’.
We must be clear in our mind of what we are and what we want to be – investors or speculators – and tailor our strategy accordingly. If we intend to be investors, we must develop the proper temperament for that, he said.