Rakesh Jhunjhunwala is the Mother Theresa of the investment world because not only is this Living Legend eager to share his investment techniques with us, he is also happy to let us in on the most well guarded investment secret on how he made his billions .
But, Rakesh Jhunjhunwala, the wise sage that he is, is a man of few words. He is reticent and when he speaks, it is because he has something to say and not because he has to say something! So we scoured through hundreds of transcripts to decode his investment secrets. Now, we are proud to present our own version of Rakesh Jhunjhunwala’s tips on how to find multibaggers.
Tip No. 1: Don’t Look For Multi-baggers
Rakesh Jhunjhunwala’s first investment mantra on how to find multibaggers is surprisingly different from what you would expect. He says: "Don’t look for multibaggers. Don’t seek them at all. Let the multibaggers come to you!"
What is the living legend saying?
What Rakesh Jhunjhunwala is saying is: Don’t go out into the investment world saying "I only want to invest in potential multibaggers". Instead the Investment Guru says "Go back to the old-fashioned way of making investments designed by investment maestros Benjamin Graham, Peter Lynch and Warren Buffett". "If your homework is right and you have invested in fundamentally sound companies with good growth prospects, your investments will by themselves become multibaggers with the passage of time".
Sounds simple but the Buffett of Mumbai is not content with giving abstract or theoretical advice because this great investment legend already knows that his disciples are a bunch of doubting Thomas and even his words of undeniable gospel will be met with stoic skepticism.
So, the master gives examples of what he means.
Rakesh Jhunjhunwala gives the example of BEML which several years ago was quoting at a pittance because it was regarded as a slothful government enterprise. No investor in his right mind wanted the shares of BEML at that time. But while other investors saw a sluggish government corporation, Rakesh Jhunjhunwala saw efficient management, a great product line-up and effeicient cash-flows. The result: the master got a bountiful; he got his multibagger.
One example is not enough to convince the cynical masses. So, the Oracle of Mumbai gives another example – that of Bharat Electronics – which also was regarded as a Babu-wala company by other investors who couldn’t see what Rakesh Jhunjhunwala’s discerning eye could. Another humble company turned into a multibagger by sheer passage of time!
Now you are convinced. But the master does not rest. He goes for the jugular. Now, he gives a counter example.
What would an investor "looking" for a multibagger have bought in the heady days of 2000? The naive investor would have looked around and seen "spectacular" companies like Himachal Futuristic, Global Tele, Pentasoft soaring on the stock exchange, making new highs every day. So, the foolish investor would have tanked up on these shares thinking that these shares were his best bet to net a multi-bagger.
The result: You don’t need the great Rakesh Jhunjhunwala to spell that out for you.
So, now you know why the living legend of the investment world says: "Don’t look for multibaggers!"
Yes, the point sinks in and you have understood but then you rub your eyes incredulously and ask "But what do I look for in a share?"
Rakesh Jhunjhunwala is not regarded as the greatest investor in India for nothing. He has a well-considered answer for that as well. And if you think about it, his answer is made up of pure common sense.
Tip No. 2: Don’t Look for Profits; Look For Sources Of Profits
Rakesh Jhunjhunwala cautions that most investors obsess about the current sales and profits. They look at each quarter and focus obsessively on short-term profits. "That’s missing the wood for the trees".
Instead he says "Look at the sources of Profits. What are the reasons that will give rise to Profits in the medium and long-term term".
He drives home the point. "Look at the factors and circumstances that will create an opportunity for business in the sector".
Rakesh Jhunjhunwala gives the classic example of Infosys and Wipro. While the average Joe would have sat with his calculator analyzing Infosys’s & Wipro’s PE, ROE and nonsense like that, an astute investor in the 1990s would have realized that an internet revolution was coming in the next couple of years. He would have also realized that the off-shore business segment was booming and he would have tanked up on those shares.
Rakesh Jhunjhunwala gives another spectacular example: That of Praj Industries, a company engaged in manufacture of bio-ethanol fuel. When Praj Industries started out, nobody realized the massive demand that would arise for alternate fuels like ethanol. An investor would could have foreseen that would have had his multibagger.
Tip No. 3: Forget ‘Large Cap, Small Cap’ Nonsense – Look For Scalability Of Operations:
The master makes two very important points. First, the investing maestro expresses his contempt for the obsession that many analysts and investors have for the debate on whether large cap, mid cap or small cap stocks are better. "Forget all that and Look for Value" he thunders. "If there is value in Large Cap, buy it. If there is value in Small Cap, buy it. But don’t obsess on irrelevant matters", says Rakesh Jhunjhunwala, the one with infinite wisdom.
But he makes his preference quite clear. He says that given a choice and all things remaining equal, a mid-cap or a small-cap is a preferred bet because the valuations will be low and they can scale it up quite quickly.
Tip No. 4: Give it Time, Be Patient:
Rakesh Jhunjhunwala reiterates what the maha investment gurus like Benjamin Graham and Warren Buffett have been advising over the past several decades. Warren Buffett was plain in his advice "Our favourite holding period is Forever". Rakesh Jhunjhunwala gives the same advice: "Give your investments time to mature. Be Patient for the World to discover your gems". He cites the examples of Crisil, Titan and Pantaloon Retail which he has held on for several years now and has absolutely no intention of divesting them any time soon.
When Rakesh Jhunjhunwala bought Lupin it was just another mid-cap pharma company starting out into the world of generic drugs. What he saw was a good efficient management which knew its job, a debt-free status, a good product line up and a growing market. That’s all. He bought and played the waiting game. When the market matured, he cooly raked in his billions.
Rakesh Jhunjhunwala also fondly talks about his investment in Karur Vysya Bank which he has held onto even after about 20 years since he bought them. He says that his paltry investment of Rs 2,000 is worth several crores today thanks to the patience and conviction that he showed.
Rakesh Jhunjhunwala is never tired of emphasizing that first you must always remember that you are buying a business and not just a little thing that bounces 2% around every now and then. When you buy that business, it must be of a very high quality, one that is capable of growing over time. Having done your hard work, you must wait for the market to do its work and reward you, says Rakesh Jhunjhunwala.
Tip No. 5: Don’t get carried away by short-term aberrations:
Rakesh Jhunjhunwala cannot stop criticizing investors who are obsessed with short-term trends. He emphasizes that he does not worry about quarterly results. If the results are bad in one quarter, he does not get perturbed. What he is looking for is: Is there a trend? Are the quarterly results showing a trend and suggesting something or are they a mere aberration?
Rakesh Jhunjhunwala also cautions that one should not get carried away by short-term trends. He cites the oft-repeated example of 1999 when investors bought truck loads of Himachal Futuristic, Global Tele, Pentasoft while he used to buy Shipping Corporation and Bharat Electronics because he saw long-term value in them. The Oracle of Mumbai says “Never get carried away by aberrations, recognize and respect them but do remember that the market corrects its aberration though it takes time.”
Rakesh Jhunjhunwala then adds that if the market behaves irrational and punishes a stock for short-term aberration, that’s the time for you to jump in. He cites the classic example of Titan Watches to buttress his theory and explains that Titan suffered in a moment of crisis when it went into Europe and lost a lot of money. He says he wasn’t perturbed because he knew that what is most important for Titan is India’s prosperity. He envisaged the future and knew sub-consciously that Indians were going to buy far many watches and that the underlying business should be great. So, in a moment of crisis you can get great valuations and if you can envisage the future where the product could have great demand and great growth, you should use the opportunity to buy.
Tip No. 6: Invest in a business that you can understand:
If you look at it hard enough, you will realize that Rakesh Jhunjhunwala’s reluctance to buy Himachal Futuristic, Global Tele and Pentasoft even in their heydays and his preference to stick to Shipping Corporation, Bharat Electronics and the other tried and tested names reveals another great investment tip from the Prince of Dalal Street: Buy what you know. Do you understand the business enough to be able to know what will happen 10 or 20 years from today. With Shipping Corporation, you can because shipping of goods will continue to happen for our foreseeable future. But you can’t tell that with technology companies which may have a great product today but which may become obsolete in 5 years.
Tip No. 7: Don’t worry about the macro stuff like fiscal deficit, inflation etc which are unknowable. Focus on what is knowable:
Another immensely practical tip from India’s greatest investor, for us folk who keep obsessing about currency fluctuation rates, inflation, fiscal deficit, political turmoil is: “Don’t worry about things that you neither know about nor can do anything about. It’s not important. Instead focus your energies on what you can and should know well enough – the business of the company you are investing in“.
Tip No. 8 : Don’t Try To Time The Market:
Rakesh Jhunjhunwala endorses the validity of investment advice that has been propounded time and again by the wizards of investment time and again. Never try to time the market because you can never find the bottom of the market. Instead if you are getting the stock cheap in terms of its intrinsic value and future prospects, buy it.
Here, one cannot resist referring to similar advice that Warren Buffett, the Emperor of Wall Street, gives. Warren Buffett points out that Coca-Cola made an IPO in 1919 when it issued shares at $ 40 each. A year later, the share was quoting at $19. You might think that’s a disaster because the share had lost 50% of its value in just one year. After that there was sugar rationing and the farmers were rebellious. Years later, the Great Depression and World War II happened, there were thermonuclear weapons and what not. He says you could always find a reason on why that was not the right to buy shares of Coca Cola. But if you had gone ahead and bought that one share for $40 and reinvested the dividends, your investment in Coca-Cola would be worth $5 Million today.
Rakesh Jhunjhunwala echoes the words of the Oracle of Omaha when he says that you must get right is the business. If you get that right, everything else falls into place.
Tip No. 9 : If it’s cheap, buy it- Don’t pass up something cheap today in the hope that it will get cheaper tomorrow:
Rakesh Jhunjhunwala says: If you see the opportunity today, GRAB IT! Many wonderful opportunities are lost to procrastination and then you rue your missed opportunities. He says that it is not only important to identify the opportunity but then to be decisive and to act on it. He cautions against getting stuck in a trap where you are perpetually seeking extra information to validate your idea.
In this, Rakesh Jhunjhunwala echoes the wisdom of Warren Buffett, the Oracle of Obama, who in the depths of the great stock-market depression of 2008 inspired investors by his clarion call "If you wait for robins, summer will be gone".
Tip No. 10 : Don’t buy stocks that have a fixed return:
Rakesh Jhunjhunwala’s next tip seems to be a no-brainer but it is surprising how many investors overlook it. What is the point of buying shares in a company such as an electricity company where the return on investment cannot by law exceed a certain amount, asks Rakesh Jhunjhunwala. But, he does emphasize that this logic does not mean that electricity and utility companies should not form part of your portfolio because they offer an excellent defense mechanism to the vagaries of the stock market with the undemanding demand for their product and their predictable cash flows.
Tip No. 11: Ride your winners!!
The one question on everybody’s mind is "When do I sell my multibagger?" Rakesh Jhunjhunwala answers with aplomb "Never".
One must be careful to understand what the great investor is saying here. What the Greatest Investor in India is saying is: "Don’t sell for the sake of selling because you can never say that the 10-bagger today will not become a 20-bagger tomorrow".
But, Rakesh Jhunjhunwala hastens to clarify that this does not mean that one will never sell a multibagger. He gives two situations when even he may sell his beloved multibagger. The first is when he is short of funds and he needs capital to invest in a stock that will give even better returns than what the existing one will give. And second, when the stock market has become so irrational that the perception of earnings and the P/E is unsustainable. He gives the example of what happend in 2000 when euphoric investors laid bets that Infosys’ earnings would double every year for the next 10 years. Infosys’ P/E at the then current earnings was 100-150 times. So, says Rakesh Jhunjhunwala, when the expectation of earnings peaks and the P/E is unsustainable, that is the time to sell.
Tip No. 12: Concentrate, concentrate & concentrate!!
There is a perpetual battle amongst investors on whether a diversified portfolio approach is better or a concentrated portfolio is better. (See Benefits of a concentrated portfolio).
Rakesh Jhunjhunwala is an unabashed proponent of the concentrated portfolio theory. But his theory must be carefully understood before being implemented in practice as it can otherwise lead to disaster.
Rakesh Jhunjhunwala emphasizes that one must venture into a concentrated portfolio only after one is sure that he has identified a share that will deliver superior returns to all the other chosen shares. The conviction must be extremely strong.
Rakesh Jhunjhunwala is not one to take risks lightly so must also be wary of the risks of a concentrated portfolio. In the recent past, we have seen so many excellent companies lose large portions of their market cap almost overnight. Some examples can be BP which was touted as the best buy in the oil space but which owing to the oil spill in the Gulf of Mexico is today regarded as a pariah. Other examples are RNRL which not only lost the battle in the Supreme Court with Reliance but then announced a disastrous merger with RPower which short-changes RNRL’s investors. Aban Offshore is another example which lost its’ Oil Rig Aban-Prince in the high seas and saw its market price plummet 25%. Yet another example is that of Satyam whose founder Ramalingam Raju was felicitated as the "Most Promising Businessman" by Earnst & Young. He later confessed that all profits shown in Satyam were bogus and that he and Maytas Infra had played a big fraud on the hapless investors.
So, while there are benefits to a concentrated portfolio, one must not be oblivious to its risks, cautions Rakesh Jhunjhunwala.