Saturday, January 2, 2010

Rakesh Jhunjhunwala on how to pick the right stock .....

This maybe a repeat post, but seems that this is a very specific post....

Rakesh Jhunjhunwala on how to pick the right stock
Published on Tue, Nov 17, 2009 at 15:25 Updated at Mon, Nov 23, 2009 at 11:35 Source : CNBC-TV18

If you’re a proponent of value investing, which involves buying stocks that offer value when they’re cheap and holding on to them till they achieve their potential — Warren Buffet style — here are tips from India’s own Buffet, Rakesh Jhunjhunwala, that you may use.

— Jhunjhunwala’s advice to investors is not to look for companies that would give profits but understand factors that help in creating profits. “Don’t emphasise too much on analysis of profits,” he says. “Profits are created due to various stages of circumstances. I always look at how large is the opportunity for that business in the sector.” ( I think, I are doing the same here.....I have never talked of what the NP is, I have always talked of what a Co can become.....Least to say, I am not comparing myself with RJ, but can say I am on the right path after reading this...)

He recalls how he bought Praj Industries, a bio-ethanol company that gave him large returns. “When I bought Praj, we thought there would be a humongous demand for ethanol. The opportunity was huge but it was not recognized.”

IT bellwether Infosys, he said, benefited because of the internet revolution. “Nobody knew about Infosys in 1993 but Infosys could become Infosys because the opportunity for the internet went through the roof.”

“When opportunities come, they can come through technology, marketing, brands, value protections, capital, etc. You need to be able to spot those.”

“Then I look at scalability of a particular company that I choose in a sector,” Jhunjhunwala says. “A friend of mine asked me: should I invest in a small cap or largecap? I said we must invest in the smallcaps, which will be the largecaps. The biggest challenge of investing is that you should recognise whether organization has the ability to scale.”

Jhunjhunwala says he makes an investing decision by understanding how a company’s profits may grow in the next four-five years, and by that account, its price-to-earnings and valuation. “If I succeed in making the right call, then after four-five years, I do a proper re-examination of the business model and accordingly reallocate capital because the business model can undergo change. Intense competition could emerge in that sector,” he says. “This is when I examine the earlier opinion I had made when I first bought, whether those assumptions still were valid.”

— How should you spot a good company? “You can have an idea by looking at companies’ capital raising. Are they distributing profits, are they using the surpluses in the right manner,” he says. “For me, quarters don’t matter. There can be always be an aberration in one quarter when the company has less profits. You should examine the reason for it and whether it can revert back on its growth.”

— Choices of asset classes is important too, says Jhunjhunwala. “If you bought gold in 1970 and sold it in 1980. you bought the Nikkei Index in 1980 and sold it in 1989 and then bought the Nasdaq [till before the dotcom bust], you would have made 33% compounded returns in three decades,” he says. “Warren Buffet rode the entire wave of those different asset classes.”

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

— Don’t get carried away short term market trends, he says. “In 1999, people used to buy Himachal Futuristic, Global Tele, Pentasoft, I used to buy Shipping Corporation and Bharat Electronics because I saw long-term value,” he adds. “Never get carried away by aberrations, recognize and respect them but do remember that the market corrects its aberration though it takes time.”


  1. Hi Rajeev,

    Indeed this article is worth re-publishing.

    Earlier in 2007, I lost up to 40k by following the stocks in short term mode (mainly Indiabulls and Siemens).This made me to hate stock market.

    Two years later in 2009, I met a colleague of mine who has been doing the value investing since 1998.

    He made me to realize how the Value Stocks (Early Bird Catching) can change the Portfolio-Value if a sincere study is done in understanding the Company and the Market Trends.

    Thank you for the good article.


  2. Prashant,
    I am happy that you have returned back.
    Thanks for that your friend.
    But the most important part in stock market is , one need to able to see the future.If one is in negative mode , one will never make great returns.Untill one is positive , one will hold that stock for greater profit.
    Otherwise one will end up selling at much lesser profit and after that stock will go up by many times...

  3. Hi Rajeev,

    Can you give your comments over AMP Industries in the same business as Suryalata Spinning Mills i.e in Synthetic Blended spinning. It's available at CPM of 41, BV 251, FV 10 and promoters holding 62% with 4.9 % pledged.

    In case you haven't tracked it. Please have a glance, it might be truly helpful to me and fellow boarders.

    One more company for your advice please Pan India Corporations which was previously known as SRG Infotec, I am unable to get the information about this company its CPM 0.86, FV 10 , BV 2.82, MCAP 18.21.

    Thanking in advance.


  4. Varun,
    I am not that good in Textile sector.I wrote those name in list because I remember they were market darling and were quoted high at that time.
    In textile also there are many types and I don't track which are having great demand.
    But ,prima facie, APM Ind looks good on fundamental front as u have said, BV is 250 and stock going at 1/5 of that....
    I was tracking Pan India in last bull run but have completly outtracked it this time.The reason is there are so many stocks available so cheap then why to go with penny stocks?...

  5. Many Thanks Rajeev, your are always spot on. Your are gifed by god but I can also smell the ample effort made by u on you each and every recommendations and answers. With all this in place I am sure one day you will achieve what you are thriving for. All the best.

  6. Thanks Varun,
    But I have seen that nothing works untill your time to get one has not come and that time may not come in entire life or if come maybe at the fag end of the life....maybe I get in my next birth......hahahaha.....
    but just now it is a pure case of no return .....and I don't mind that either...because I love this job....