He has got an acute sense of the economy giving him an edge over others. In a freewheeling chat with CNBC Awaaz's managing editor Sanjay Pugalia, the media shy Samat opens up about his personal triumphs and his views on various issues.
Below is a verbatim transcript of the interview.
Q: What are the top tips investors should keep in mind while investing?
A: When I started somewhere in 1955, it was the controller of capital issue, which was in-charge. It was his duty to see that the companies who needed capital or who came for the capital unloaded the investment on the public at a very reasonable price. The value was the whole focus of the controller of capital issue. That kind of an advantage we do not have now.
The second thing is that in the last 50 years, i.e. 1955 to 2000 was a period of great stability in which you could visualize what may come about. So you can take a stand for a longer period for compounding of your wealth.
Q: How do you identify good companies from the bad ones?
A: Look out for four things. One is least capital expenditures. Two is since there is least capital expenditure, there are no borrowings. That means there are no future costs that are not provided for. Three is the return on capital employed should not be less than 25%. Then it adds to the fourth that these companies give a big chunk of their earnings as a dividend.
Let us look at it this way: The Dow has compounded at 5% in the last 100 years but the good dividend paying companies have done the other way. They have done 8.5%. So dividends are more important. It is real cash flow in the hands of the shareholders. All this, what you call innovations in the form of bonus — bonus is nothing else but an ‘IOU’ given for the accrued expenses still not incurred. So what is necessary is, how much dividend do we get? Is the dividend compounding?
There have been some companies here where the compounding of dividend has been as high as 50%.
Q: Which companies would fit the bill in this criterion?
A: You won’t get more than eight-10 companies. We have already entered a very turbulent time where there are absolutely no certainties. You perceive your investment to be — however you may think you are going to create wealth out of it — it may not work because of the turbulence that is happening all around the world.
Therefore, depending on the age, one must have other income, which one may be able to write-off should things not work out. ( I have been writing this many times here that one should be able to writeoff that amt invested in stock market and still one is able to run the house.One needs to have other income where one can run the daily expenditure of the house)
In the strategy that I follow, I don’t cover more than 10 companies in my investment portfolio. If you spread it out, so many of them will go wrong and very few will come right. So it will be squared out. But if you are in eight-10 companies, even one giving you everything, will cover your wealth.
Q: What is your favourite theme right now? How would you look at different businesses going forward?
A: We have already entered turbulence where sustainability is broken. The cycles earlier used to be 150 years. Then it came to 100 years and then to 50 years. Now upto 2000, it has come to 10-20 years and maybe with the turbulence that is now taking place, it will be still shorter. Therefore, your ability to write-off the risk should be pepped up.
Q: There were limited means of investment during your times. However, things have become a lot more complex in the current scenario. We see the derivative segment dominating others where there is more risk. How do you read the situation?
A: I would say it the way George Soros has put it. Today, the mutual fund industry is around USD 70 trillion world-over. They only chase momentum and no value. What it is now and what is their performance is what they want to decide. They don’t want to see values and as I have said as well, in the new age, the values are also deceptive because the cycles are getting fractured.
Now the new cycle that is getting fractured is the advent of this type of global economy. That is getting fractured.
Q: What is your biggest concern for the global economy?
A: Let’s look at what can affect the global economy because we are totally linked to it. We are not in anyway immune. So, you take the instance of the United States (US) today, which will have a constitutional liability of USD 240 trillion by 2040, mainly in social securities and healthcare.
The deficits are growing. These are financed by their current account deficit and by QE1, QE2 and what not — by easing and printing to attain US aims. Now, the same thing is happening here. We are financing our consumption-based growth today. What we talk about 9% growth, it is entirely based on current account flows coming in and the current account deficit is financed by these capital flows of USD 4 trillion a day because they are greedy. They want immediate returns and for that point they are there.
Our fiscal deficit is growing. So what happens at a time when the US, which is a reserve currency, cannot reroll its debt and the whole global economy is today predominantly invested with the reserve currency, that is the US dollar. That is the biggest risk — if it gets fractured and the whole system falls.
Q: Do you think the worst is over or there is still more to come?
A: There is a huge asset liability mismatch that is taking place. The real assets are provided by mother earth. This is something which we have inherited. The mismatch is the printed fiat money, which finances the global capital flows. They are the liabilities. This asset liability mismatch is growing at a very rapid pace.
As I see it, a bigger crisis may come about perhaps even within my life time — it’s quite possible
Q: I had read an interview of yours in 2005 where you might have predicted the 2008 crisis. How can we insulate ourselves from global turmoil?
A: I think today the entire national charge world-over is with politicians, bureaucrats, economists and elites. What happens is they are more concerned about their short-term benefits. They want to ignore what is coming — maybe they know what may come about but they want to keep it aside. The first duty of these who are in charge of the economy is to really inform the people what is coming and some steps should be taken to get into this kind of a social equality which is needed, if we want to avoid revolutions which we are now seeing.
Q: Can you elaborate more on the concerns that you talked about?
A: The first thing would be if abruptly the capital flows stop. We cannot finance the current account deficit. Then the question is that since the natural resources are limited and there is a prediction by scientists that water shortages, food shortages, concerns about climate change — destruction of fauna and flora, deforestation — all these are elements of uncertainty. So how do we contend with it? The public should know about that.
Q: Do you think the premise of the India growth story is flawed?
A: Yes, it is true. Please understand the power of compounding. If we compound at 9% what can happen? What will be the printed money that will need to finance it? What will be the inflation and what will be the social attitude of our 75% of the people who earn just dollar a day? What are we doing — have we given a thought to it?
Q: How can the world overcome this financial crisis? Should we change our reserve currency and look towards gold etc?
A: The question of gold standard can be put very differently. Today, there is an asset liability mismatch. The assets are what is provided by nature and which cannot be replicated or which cannot be generated. It is what it is. We are just taking it out. The ratio of the printed money in relation to the real resources — this is a new gold standard. That is where we need to go and to go to that particular concept, what we need is a multidisciplinary team.
Q: This should be the job of political leadership of a country. Do you think our political heads will be able to meet these challenges?
A: I will put it this way: what we need at this stage is a call to those who are in-charge of the nation, they will need integrity and integrity is not merely humility. It is courage. They will have to develop the courage to come to the real integrity level. Our leadership is known for its humility, but it should now be known for its courage.
Q: What is your assessment of India Inc?
A: I think it is not the Indian companies alone. This format has gone world-over that every corporate is today interested in what it is now. They are least bothered with what can happen to the retirement funds. The holders of retirement funds have to be paid and if this USD 70 trillion worth of funds get fractured by this macro-economy what can happen. They have to think in that way and that is real corporate responsibility.
Q: Which company or sector would you choose to invest in right now?
A: I wouldn’t like to point out anything in particular. But I have talked about the platform companies where I have a vision. The vision may come true or it may not come true. If it doesn’t come true, even in these difficult times I will be able to stand.
But for that what one needs is high enlightenment and that is number one. Number two is high integrity. Number three is the vision for the value and number four is frugality. These are the four things on which I depend.