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.