In an candid chat with financial expert Ramesh Damani in a CNBC-TV18's special RD 360, stock market veteran Jhunjhunwala advises looking into stocks that are not very popular. "Never in my life have I not made an investment because the stock is not popular. In fact I like to make the investment when the stock is not popular."
Here is a verbatim transcript of his interview. Also watch the accompanying video.
Q: Your life in the stock market is over 25 years and there is the trading side of you and there is the investing side of you. There is the general philosophy. Let us start with the trading part of you because a lot of people know that you are a very active trader and you love trading markets always, right?
A: Like wives they are always right. With wives you can argue but with markets you can’t.
Q: And you can never win
A: With wives you can never win but with markets you can, if you accept that market is always right. Because after all everybody has an opinion. RK Laxman made a caption that there is a difference of opinion which makes racing interesting. You say A horse will win while someone bets on B horse, so all have opinions about markets. And we place our stakes based on our opinions but finally markets determines.
Q: But markets do things in excesses? Markets get a lot of things wrong, so what explains the markets always right?
A: If you read the book ‘George Soros’ he earned a billion dollars against the pound. What he said was when the European Monetary Union was made, he realised that this will not last. In order to align the currency within a value, you have to have a common monetary and fiscal policy. He knew that the Germans do not believe in God but they believe in the Bundus Bank. So, the Bundus Bank would not agree to align the fiscal and monetary policy or Germany with the fiscal and monetary policy of intent.
So, he knew this was not going to last but he said you have to time it you have to wait for it. Markets make excesses but those excesses come to an end. In 1991 we knew that money is coming irrelative from somewhere but do not know from where. The valuations are all humbug, they have to end. But while it was rising you have to participate and I participated. But the moment you know it is going to come to an end and the market would indicate- volumes would taper off.
Q: Understanding that is important?
A: Markets make excess. You have to judge how long will that excess last and when will it end.
Q: As Keynes says markets can remain irrational the longer than you can remain solvent?
A: Absolutely. So the question is ‘markets are right, they are going to make excesses and in those excess lays opportunities’. We got to judge when those excesses are going to end and we will try and make money both ways. Going long, going short, going short, going long.
Q: Why not? I think I got to know you in the 1990s in the ring of the old Bombay Stock Exchange and 20 years since then there is one maxim that stands out about you is that you have said it in numerous parties, bars and in the ring. I would say it and translate it in English it says ‘vadhere vadhare levanu vadhare vadhare beichavanu’- that means buy as the market is rising sell as the market is falling. What is the wisdom in that and how do you use it?
A: I do no think for a good trader we do not initiate more than 40% of trades which are white. Say I am bullish on XYZ stock I buy that stock – if it goes up it is an indication of the fact that I am right. We do what is called as pyramiding. I buy a stock at Rs 100, I buy more at Rs 105, I buy more at Rs 110 so what are markets, what it is trading? It is basically momentum, so you play momentum. If the market is rising ‘vadhere vadhare’ its momentum is upwards. You buy on the rise, if markets are going down, you sell on the fall. This I do not mind I do not indicate in long term trends, medium term and short term trends. This applies to short term trends, medium term trends and long term trends.
Q: So you should never average a losing trading position?
A: Well at our own cost. At least I never do it.
Q: That is a huge mistake, isn’t it?
A: Unless and until we believe suppose I buy a stock at Rs 90 and I feel it is going to have a big upside and if the fall is 4-5% I might average.
A: As a rule in trading I will never ever average.
Q: Are you then saying then that a good trader should have this highest position outstanding at the highest price?
A: Absolutely, why not, who knows what is the highest price.
Q: It is counter intuitive though, isn’t it?
A: That is why out of one million traders only 90-100 make money.
Q: What would you look for?
A: I would look for broad direction, don’t try to be an expert or predict every move, every hour, every day. Take a loss, know what to stake. I think I feel confident to trade anywhere in the world or what you need to have is a broad direction of the trend and very broad ideas. Don’t try to be an expert in it, know what to stake and when to take a loss.
Q: Most people cannot hold on to taking profits, isn’t that the big problem?
A: It is a problem but who knows – I don’t know I watch on this TV, the targets. What are the targets, who can predict anything? When I buy a stock that comes a level which I also feel that the price is unreasonable but at that moment I am alert that unreasonableness has to be combined with technical weakness then is only the move exhausted.
Q: That means the lower, poor volumes, barred price action etc, things like that?
A: Absolutely. General trend and then the general belief of just believe in the market, just go up, there is no tomorrow.
Q: Please don’t go to the sky. There is other thing that all good traders always pronounce is know how to take a loss, why is that so important?
A: Because nobody can predict momentum, it can turn, we never know all big moves start with small moves and therefore the price is the first indicator of what is coming.
Q: Give me an example of something that you parlayed up into a great trade, not investing but trading. Go back to the ACC days.
A: I think the greatest trade I made in my life was between 1989 and 1992.
Q: During the Harshad Mehta bull run?
A: Yes, because I first earned on the budget, everyone was so bearish, I made money. We made money right at the point, we sold nearly at the top then we shorted the market during the Gulf war then we cut at the bottom. Then when Manmohan Singh became the Finance Minister, we bought lot of stocks.
Q: I remember that Budget day, you were aggressively buying.
A: Right, and then we slowed it upto 2,800-2,900 then we went short once, we lost money, I cut my losses and I remember I was short 15,000 shares of ACC and at 4o’clock in the afternoon Saturday, I called my broker and I said, “Whatever be the price and whatever be the cost, at 6o’clock I want to 15,000 shares covered” and then at Rs 3,000 I was long. So, that is why I say you have to lose many a battles to win a war.
Q: That lesson came back in various ways to you in 2001, didn’t it? You had turned wildly bullish on the market and the market was not supporting that point of view?
A: I was wildly bullish only on the investment side. I don’t carry generally more than 2-5% leverage, I carried 35% leverage in my investment and I carried it for 12 months but in my trading positions, I always trade with price. If I would do a trade, so long my XYZ stock is at Rs 100 and it goes to Rs 120 and I buy more, no worry, by the time it will be Rs 90, we will all squared off. I cannot see it, I cannot eat, I get such uneasy and sometimes in the markets again we are uneasy till 9.15am and at 9.45am it is squared off, fine.
Q: Tell us another trading stock or position that worked for you or didn’t work for you and why it didn’t work for you?
A: I think in 2003, I started buying Tata Motors at Rs 240. At Rs 375, I had a position of 2 million shares and at Rs 340 I squared off everything. It was a great trade, I made a lot of money in just two months just in Tata Motors, that was a great trade.
Q: The maxim that the big money has made a big swing, is that true for trading?
A: Absolutely. In my case also I have owned money in trading – it is not that every year I made money. I made it in spurts and I have made it in certain periods, 1989 to 1992, 2003 to 2007, 2009-2010 and 2010-2011 has been a good year. So I have made it in spurts. 1994 to 1999 I wouldn’t have made any trading income.
Q: The idea is always as you said – when the ion is hot, strike.
Q: Don’t try to make Rs 50,000 a day.
A: We are not earning and trading by employing billions of dollars in trading. My net capital employed in trading is Rs 1 lakh. So if I earn even Rs 1 crore, I cannot imagine the return on equity because everything else is borrowed and I pay interest on it. So my real capital of my partnership is always Rs 1 lakh.
Q: That is interesting, so it is pure leverage.
A: Pure leverage, I put mine and my wife’s assets and borrow money and I use that.
Q: Let us talk about your investment career and I have addressed many press conference, investors meet with you and the one thing that always gets response with audience is when you say ‘if the girl is pretty, the suitor will come’, agar ladki acchi hai, koi na koi aa hi jayega, explain that philosophy underlying there.
A: I and you were so much bullish in the public sector stocks, right? Now people ignore them. So, if a company is good, why will buyers not come? Everybody wants to make money in the market, it is only a thing that suppose sometimes we are lucky to recognize opportunities ahead of the market, even if recognition is right why will the buyers not come? Never in my life have I bought or made an investment because the stock is not popular. Infact, I like to make the investment when the stock is not popular.
Q: You get it cheaper.
A: Imagine a VIP was Rs 65 fifteen months ago and today VIP is Rs 650. Why there was no buyer at Rs 65, today there are buyers at Rs 650. So that maxim is proved. The only thing you have to do is choose the right company.
Q: Choose the pretty girl?
A: Choose the pretty girl.
Q: Give me some more examples in your career when you had so many great stocks Titan and Praj to name a few. Give me an example of where you felt the girl was pretty and the market for whatever reason called it an ugly duckling.
A:Lupin. When I invested in Lupin, there was so much doubt. For that matter nobody recognized Praj and Titan. Titan was in one hell of a jam, their debt was atleast ten times the marketcap and they were in serious trouble. But by God’s grace, the companies worked out.
Q: But what made you think that Titan was the pretty girl?
A: Because my basic call in my investing is on India’s macro and I thought India is going to have a huge consumer market. I think Titan itself is surprised by the kind of opportunity they are seeing. I thought Titan is well entrenched, nobody could come in the watch business; they are a very good marketing company.
I thought branding business in jewellery will eventually succeed and remember one thing, my investment strategy is a entry value, a constant review and a perceived exit value, which changes with every review. So, it is not that I and you have an investment in Titan, I invest in Titan at Rs 32-33. I thought it would have a price of Rs 200-215 in five years, ofcourse now about eight years have passed, I never thought that the shares will be in four figures but once I interacted, I invested, in six months I had an opinion that this stock will go to four figures and I bought upto Rs 150-160 and I could not envisage the Titan of today.
Q: What does your review tell you about Titan today?
A: I think valuations are not cheap but the opportunity is large. I think it is a unique company in India, I don’t know if any company in India where both its principle businesses and its competitor is 10% its size. A lot of people tell me that jewellery business margins are low, I said that is why I like the business. I think there is humongous entry barriers, there is a passion in the company, there is a dream in the company to be very big and there are extreme opportunity, nobody never bought Fast Track – I think the most exciting thing that I find about Titan is not Tanishq but Fast Track. It is India’s biggest youth brand. If you look at the potential market, if you look at the marketing skills, it is unbelievable.
Q: 50% of the population is below 21 years of age. The other maxim that goes hand in hand with this is which you have said ‘it is not what you buy – what you buy is ofcourse important but the price at which you buy is more important’.
A: I will give you two examples. HUL, the ultimate blue chip in 1992 when index was 4,200, the price of HUL was Rs 17-18. In 2001 September, it was Rs 329 when the index was 2,900. I think in 2005 if I am not wrong, the price was Rs 148 when the index was 6,000 and today also the price is not crossed Rs 329.
So you might have bought HUL the chips of blue chips – which after nine years we have got no returns.
Q: But you paid the wrong price.
A: Right. Look at United Breweries, I think both of us bought together at the price of Rs 15-17, people warned you are buying Mr Mallya’s company, you will not earn anything. I calculate for Rs 100 crore marektcap, you are getting 60% of India’s liquor industry. I made all the money there. So, I think it is important what you buy, it is more important what price you buy.
Q: There is no substitute for buying cheap, is there?
A: Is there a substitute for a pretty girl?
Q: Clearly not.
A: The prettiest part of the stock is that it has to be cheap – the entry point.
Q: You are not a cynical guy, you are an optimistic guy and that is what investors should be.
A: I think we are living in optimistic times and I think I tell everybody the first quality to invest in India is to be an optimist otherwise the RBI bonds are always there for you.
Q: More than 25 years career in the stock market, many ups and downs, many booms and bursts, has any maxim changed. You don’t believe in it anymore or anyone that has been reinforced by, has the wisdom stood out or something you realised is just not true?
A: I think the best quality that I carry in my profession is my ability to observe, imbibe and learn and that has given me a sea change. My risk appetite as an investor has come down dramatically. I still have a very high risk appetite comparatively but it has come down dramatically. Radha Krishan Damni will give importance to what is present and most likely rather than what is in the future but will give a great return. So, I was always giving very great important to what is in the future but now I am tempering that – time is tempering it.
Q: To explain it in ordinary terms, you would rather buy a stock after the oil has been struck by the company rather when the prospects have been struck.
A: Right, unless and until the valuations are too compelling. I would like to invest with lower risk. Suppose I invested in two-three software product companies, all went dud. I lost my money, yesterday one company came to me, I didn’t invest, I told them, “these are great ideas but to mass these ideas will take 10 years. I don’t want the returns by the time my children are grown up” and I refused to invest.
Q: Is investing the key maxim, we always talk in business school atleast about low risk-low reward, high risk-high reward, isn’t the correct maxim then low risk-high reward?
A: If you can find it. I don’t think it is high risk-high reward for the simple reason that the highest risk is in lottery. You don’t get the higher returns there. Remember one thing that even in my investing career, I have made 10-12-15 good decisions and I think there was a very big role of God and his grace in doing that. I don’t know one day Dhaki called me and said that there are half a million shares of Titan available and I had no inkling to buy Titan but when you offer it, I bought it and then the whole story started.
Q: Invest first, investigate later?
A: Yes, because I thought at that valuation Rs 140 crorewas marketcap. Ofcourse debt was 140 crore.
Q: That is hard to believe, you actually did, you actually invested and then you investigated in Titan?
A: Absolutely. After that I bought 1.25 million shares then I met the management. But the day I met the management, I predicted that night that this price will go to Rs 1,000 and then I started buying further.
Q: Is that a good maxim to follow that you first invest and then investigate, have a monetary interest in what you are doing?
A: No, the valuation should be so compelling, the girl should be so pretty that you think of the consequences later, you first start dating her. The stock should be such that at this valuation let us just buy.
Q: Lot of famous investors say, don’t do a top-down investing, don’t do a macro-investing, do you do any of that?
A: I don’t know macro-investing. My macro call is India. My portfolio has one software company, BPO company, otherwise all my companies are 98% Indiacentric. So, my basic macro call is India. If India doesn’t grow 9-10%, Titan’s sell cannot grow at the price at which it is growing. So, the call is India.