Free 7-day Trial
All Articles and Columns »

India’s Warren Buffett Reveals His Secrets (Part II)

April 12, 2011 | About:
We continue with part II of our look at the investment strategies of Rakesh Jhunjhunwala, who was often dubbed by media as India’s Warren Buffett. (Click here to see part I.)

DON’T CHASE GROWTH PER SE


Rakesh Jhunjhunwala’s first mantra on how to find ten-baggers is to reverse your thinking: “Don’t look for multibaggers. Don’t seek them at all. Let the multibaggers come to you!” What he is saying is that investors have to look for hidden growth potential ignored by the market. Most people go out into the investment world saying: “I only want to invest in potential multibaggers.” That’s how people rush into hot stocks at ridiculous valuations. Instead, Rakesh 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.”

This line of advice echoes some ancient Zen sayings such as, “To truly possess something, first you have to let go.” “In order to see better, you should first close your eyes.” Therefore, to find growth, stop looking for growth. In order to find a ten-bagger, you have to stop looking for ten-baggers. Be a contrarian. Find out where the market is wrong. Have the courage to invest against prevailing market wisdom. In essence, the type of growth an investor should look out for is ignored growth potential.

Rakesh looks for under-researched companies with low institutional holding and under general pessimism about the stock.

A good example is his investment in Bata India way back in '96 when the shoe maker was viewed as dead boring. Bata India has almost tripled since. Another example is BEML which, several years ago, was quoted 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 strong cash-flows. The result: a multibagger. Also, when Bharat Electronics was regarded as a boring company by other investors, Rakesh Jhunjhunwala’s discerning eye saw what others miss.

On the other hand, if an investor literally look for multibaggers and seek out hot growth, what would they buy in the exciting days of 2000? The naïve “growth” investor would have looked around and found hot companies like Himachal Futuristic, Global Tele, Pentasoft soaring on the stock exchange, making new highs every day. They would rush in to buy those “multibaggers of the year” and end up seeing their assets evaporate into hot air.

DON’T TRY TO TIME THE MARKET

The interesting thing about market timing is that all great investors advise against it, but most investors simply can’t help trying it. Who in their right mind doesn’t want to buy a few dollars cheaper? Who doesn’t want to buy exactly at the bottom? Who doesn’t think that he is the smart one who could beat the game? Market timing is a game so sexy that almost everybody has been lured into it one time or another, waiting for a clear bottom formation.

While some investors hesitate on the way down, other investors miss the chance to buy on the way up. “Oh, gosh, I missed the bottom! I should have jumped in yesterday. Well, let me wait for a pull back.” And that pull back often doesn’t come. The fact is, no one can consistently get in at the bottom of the market. Instead, if you are getting the stock cheap in terms of its intrinsic value and future prospects, buy it.

Investors would be much better off if they simply forget about the market and just focus on getting the business right. The best story to illustrate this is a story told by Warren Buffett: Coca-Cola (KO) went through an initial public offering (IPO) in 1919 when it issued and sold shares to the public at $40 each. A year later, the price dropped to $19. Those who loved the stock and bought in, the bulls, would have lost more than 50% of their money in just one year. While the bulls were licking their wounds, the bears, those who hated the stock, would claim that they had looked into their crystal ball and they saw the future, the macroeconomic events. What would they see? Endless problems: sugar rationing, rebellious farmers, the Great Depression, World War II, nuclear weapons, and what not. In fact, at any given time, there were always solid reasons to be a bear and say no to 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 $7 Million by 2000.

Rakesh Jhunjhunwala echoes the words of the Oracle of Omaha: What you must get right is the business. If you get the business right, everything else falls into place.

LET THE WINNERS RUN

Many value investors sell their stocks near fair value. When does Rake Rakesh Jhunjhunwala sell his favorite picks? His answer is: “Never!”

“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 he quickly qualified his statement that this does not mean that one will never sell a multibagger. He gives two situations when even a committed long-term business owner like him may sell his beloved ten-baggers. The first is when he is short of cash that could be invested in a stock that will give even better returns than the existing one. And second, when the stock market has become overly irrational. Rakesh Jhunjhunwala gives the example of what happened in 2000 when euphoric investors laid bets that Infosys’ earnings would double every year for the next 10 years. Infosys’ P/E then reached 100-150 times. So, when the expected earnings peaks and the P/E becomes unsustainable, that is the time to sell.

According to Rakesh, it is a waste of time to set price targets based on some kind of estimate of intrinsic value, which is an invisible moving target itself. Often times, you end up selling your picks way too early at the target price. A good time to sell a stock should not be based on any “price” targets. The best time to sell is when the earnings expectations have peaked, the business model has peaked, or the valuations appear ridiculous.

There seems to be a little bit of George Soros in Rakesh Jhunjhunwala’s operation. He endorses the notion that a trend is your best friend. And he might have been “hands-on” himself to create that trend or buzz for his favorite stocks. In the past, market regulator Securities and Exchange Board of India (SEBI) had initiated investigations into allegations against Jhunjhunwala and other brokerage outfits of circular trading in certain stocks. Circular trading occurs when a set of brokers acts as a cartel and keeps selling the same set of shares to each other to create the appearance of a buying wave. India’s Income Tax Department had once put a hold on his property after a search operation in March 2001 following the Ketan Parekh scam. Jhunjhunwala had survived till now.

FOCUS, FOCUS, AND FOCUS

Should we diversify or should we concentrate when managing investment portfolios? Rakesh Jhunjhunwala is an unabashed proponent of the concentrated portfolio theory. But the focus theory must be carefully understood before being implemented in practice as it can otherwise lead to disaster. When you overly concentrate, you do well when you are right. But you could get burned if you are wrong.

Rakesh Jhunjhunwala emphasizes that you should venture into a concentrated portfolio only after you made sure that you have identified a share that will deliver a return superior to all the other choices. The conviction must be extremely strong, says Rakesh Jhunjhunwala.

ADAPT AND INNOVATE

“Value investing is relevant in all circumstances. But thought processes and principles are dynamic and not static. Be open to change,” Rakesh Jhunjhunwala says.

As to his own operation, Rakesh had reportedly used trading and leverage before. But he himself claims that he puts only a minuscule amount of his net worth on the table for trading activity using leverage.

Jhunjhunwala believes that choices of asset classes are important, too, “If you bought gold in 1970 and sold it in 1980. If you then bought the Nikkei Index in 1980 and sold it in 1989. And then you bought the Nasdaq until 1999, you would have made 33% compounded returns in three decades.” But he stopped short of discussing how investors could get into the right asset class at the right time.

------

Brian Zen, PhD, CFA, is founder of Zenway Group, a New York-based investment advisory firm that provides family wealth creation coaching programs and tutoring services to children and their parents. Through newsletters, family learning parties, face-to-face tutoring and online classes, Zenway-certified Financial Tutors teaches children the craft of investing and helps their parents to grow family wealth. Dr. Zen appreciates your questions and feedbacks at: info (at) zenway.com.

About the author:

Dr. Zen
Brian Zen, CFA, PhD, author of "Superinvestor Lecture Notes", serves as Chief Investment Strategist at Zenway Group, a New York-based registered investment advisory firm providing asset management services, training Certified Securities Appraisers (CSA), and teaching Graham-Buffett Value Investing. Previously, Brian served as vice president at JPMorgan Chase and portfolio manager at Prudential-Bache Securities and Janney Montgomery Scott, while teaching graduate-level investment analysis at St. John's University. Brian was a Bernard Baruch Fellow and graduated summa cum laude from Bernard M. Baruch College. He is also a graduate of Columbia University's executive program in value investing. Brian appreciates your feedback at: bzen@zenway.com

Visit Dr. Zen's Website


Rating: 4.1/5 (20 votes)

Comments

buynhold
Buynhold - 3 years ago
"A good example is his investment in Bata India way back in '96 when the shoe maker was viewed as dead boring. Bata India has almost tripled since. "That's less than 8% annualized, and pretty much zero after inflation there. Why spin it as a great investment? Takes away from the credibility of the article.
BrianZen
BrianZen premium member - 3 years ago


Hi, Buynhold, you have a good point. I have limited data and did not verify the stock prices. Maybe he sold out at the high? My interest in him is mainly about what works for the India market.
superguru
Superguru - 3 years ago
"According to Rakesh, it is a waste of time to set price targets based on some kind of estimate of intrinsic value, which is an invisible moving target itself. Often times, you end up selling your picks way too early at the target price. A good time to sell a stock should not be based on any “price” targets. The best time to sell is when the earnings expectations have peaked, the business model has peaked, or the valuations appear ridiculous."

What he says makes sense. Thank you for confusing me more.

How does one find out

when the earnings expectations have peaked, the business model has peaked,
Bertrand
Bertrand premium member - 3 years ago
Can someone please have the kindness to explain to me the math behind this Indian guy's success.

He's never managed money for anybody but himself according to info about him on the net. He's 50 and he says he started in his early 20s with USD100.

So my question is how do you go from USD100 to USD1bio in 30 years ? If I start with 100 and compound that at say 50% (which is more than extraordinary), then 30 years later I have 12.8Mio. This guy has a billion.

Can someone explain it to me ? thank you
elf83
Elf83 - 3 years ago
This link and another here gives more about info him and what has worked in india. In the past 25years, some stocks in the Indian market have appreciated 40-80 times and some more. And they are still on a growth mode.

To learn how investing works in India, you might rather want to read up on Prof Bakshi's interviews, Sanjoy Bhattacharya , etc. and not necessarily Rakesh Jhunjhunwala.

Having primarily invested in Indian markets for 2-3 years, I have also wondered whether this guy makes sense. My conclusion has been he doesn't and I dismiss him off from the list of ppl i would study. Compounding money at 200% in the initial few years using leverage can make you that kind of money. He himself might not be able to do it now with stricter regulations and relatively high competition from folks starting with A looking up capitaline and other manuals.
supratik
Supratik - 3 years ago
The article has several contradictions and errors.

Rakesh Jhunjhunwala is not a true-Buffett kind of investor. He only buys those stocks cheap where he believes the growth is potential is immense. He also trades in the market, invests money in pre-IPO companies.

If you want to see a few stocks where he really made his money, then you need to look at three stocks - Sesa Goa, Titan and Karur Vysya Bank.

He made his first money mostly in Sesa Goa in the early to mid 90s. He probably also made some money in it in the early 2000s period but I am not sure about that. I do know for a fact that between 2001 and 2010, Sesa Goa's price moved from Rs.2 to a peak of Rs.490 (after accounting for splits/bonuses). It is currently around Rs.330.

Titan and Karur Vysya Bank are companies where he has continued to own shares for almost 20 years and those have been huge multibaggers for him. I haven't verified the math but RJ has said that a Rs. 2000 initial investment in KVB is today worth several hundred millions.

In his earlier days he was definitely highly leveraged and was an aggressive trader. He is more of a long-term investor now but frequently trades so as to keep his "chops" alive.

If you really ask me RJ is more like a Black Swan in investing. His growth has been nothing short of phenomenal but I don't think it is easily replicated. He was also smart and lucky ,in the sense that he started investing in the late 80s just before India opened up in 1990-91 and he didn't go nuts with the dotcom boom.

Tip: One US based well-known value investing fund has invested in many companies where RJ is also invested.
BrianZen
BrianZen premium member - 3 years ago
Hi, Supratik: You clearly know more about RJ. I agree with you, RJ is not a true-Buffett, no one is. I simply said he was "dubbed by media as India's Buffett". Maybe I should have added "arguably". But do you see other factual errors in the article that should be corrected? Do you know any way to verify how poor he was when he started out?
Rahul
Rahul - 3 years ago


Please dont insult Warren Buffet. This media hyped guy is part opf cartel who speculates and manipulates Indian Market. Nothing is common between RJ & WB.
supratik
Supratik - 3 years ago
I don't know about cartelisation but his investments in Titan and KVB were quite smart. I think to be a cartel you would want to make quick entry and exit from stocks and I don't think RJ does that as much. Plus he has made the money - no doubts about that and most of which seems to be from long-held stocks.

I was surprised by a comment he made very recently when the LIC Housing Finance CEO was arrested on bribery charges. On CNBC the next day or so, RJ said that he had exited his position in LICHF as he did not trust the company anymore. To me, the LICHF bribery seemed more like the Amex Salad Oil scandal, and without any real fraud. The CEO had taken bribes but all loans given were secured by hard land assets. There was simply no fraud but just a bribe that the CEO took. The stock price dropped almost 50% before it went up a bit again. Perhaps RJ sold the stock anticipating the drop and then bought it again towards the lows. But from his mews channel appearance it didn't seem like he was planning that. (For those who might not know, LICHF is the second largest HFC in India, owned majorly by the Gov't and and has Profit Margins and ROE around 20%)

I was also very surprised when during the recent economic crisis, I saw RJ talk on CNBC about how Buffett's style of investing did not work any more. He specifically pointed out how the Goldman Sachs and GE investments were doing badly. This was when the price of GSachs was below the price at which Buffett had bought those. I thought he was being disengenuous and deceptive while making such comments.

Brian:

I think the errors in the article are more to do with RJ's approach to investing than hard factual or number errors. I am not sure where you got some of the quotes from but I know of instances where RJ has said the opposite or behaved differently. He seems to be willing to consider anything from which he can make money. For example, I have seen him say on CNBC that he will never own a stock forever. For every stock he says there is a price he will get out at. That goes against what is there in the article. RJ is also a huge bull and he has said numerous times on CNBC that India is at the cusp of a long secular bull run, of the likes never seen previously. I cannot comment on his skills of prophecy.

RJ's father was a gov't employee. I don't think Rj started with a much money. His initial investment was probably small (maybe around Rs.2000 but I don't really know) but back then that was a decent money to start with. He did take huge advantage of the events in 1990-91 and 2000-01. That's where he n-tupled his initial outlays.

BrianZen
BrianZen premium member - 3 years ago
"I was also very surprised when during the recent economic crisis, I saw RJ talk on CNBC about how Buffett's style of investing did not work any more. He specifically pointed out how the Goldman Sachs and GE investments were doing badly. This was when the price of GSachs was below the price at which Buffett had bought those. I thought he was being disengenuous and deceptive while making such comments." He said that?! That's silly. I agree with you, Supratik, and thanks for all your insights. I guess all investors and strategies have their own yins and yangs, or contradictions and limitations.

Rahul, I was just using a catchy title to attract smart readers like you. Haha!

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Hide