Extrapolating 2 years' profit to 20 years' returns biggest mistake we make in midcaps : Rakesh Jhunjhunwala
Life is not about regrets, life is about learnings, Jhunjhunwala told market veteran Madhu Kela.
Rakesh bhaiya, my friend, philosopher and guide! People have taken so much inspiration from you. People know what Rakesh Jhunjhunwala of today is. Why don’t we go back to your early days and talk a little bit about how you came in the market? Who was your real guru?
I think it is all known. I think now it is…
No it is not known, very little is known.
First I would like to contest the assertion made by the gentleman from State Bank that markets have not given returns. I started my life with Rs 5,000. If market did not give return, I could not have earned the wealth, these financial advisers could not have flourished and I do not know on what basis it is said markets have not given return. Which other asset in India has given you return? Has real estate given it? Has interest given it? Has jewellery given it? I do not know why. He is a fund manager and he asserts that equity does not give return. It is a big disappointment.
And they are all asserting, there should be blood on the streets, please be careful what you are saying. The clients will not come and hit you, they will hit all of these people that there should be blood on the streets. The only problem is wherever there is blood on the streets, although people think I am smart, some of the blood has also been mine.
Let us just talk a little about early days. How did you learn about markets?
See markets cannot be taught. They have be to be learnt. The biggest quest to learn anything is curiosity. If you are curious about something, you will go and dig. My father used to invest in the markets and in the evening he used to discuss with friends and I was always very inquisitive. I used to ask him why is Century’s price going up and tomorrow why Gujarat State Fertilizers is going to come down while Grasim, Gwalior Rayon go up?
He used to tell me you read the newspaper. When the news comes about Gwalior Rayon, if the news is good, the price will go up. At that time the market ran from 12 to 2. I was in school and college and so you could only know the price next day. But I used to follow the markets and then I got more and more curious and my father gave me a book. The International Labour Organization, had come out with a book on how to read a balance sheet for labour, so that union members can understand what is the balance sheet and what it hides and what it shows. You know, a balance-sheet is like a bikini, it shows more but it hides what is vital. I learnt to read a balance sheet and then I got fascinated by stocks.
My father was a person who always allowed me to do what I wanted but he told me you want to go to a stock market, first get yourself qualified. So, I qualified myself as a chartered accountant and my dad said what do you want to do? I said I want to go to the stock market. He asked what will you do? I said I invest. He said where is the money? You are a smart fellow. If you do not so well in the markets, you can always earn Rs 20,000 a month. That was a big sum in ‘85. You can survive but I will not stop you from doing what you want. Here I have a house, you can live here. Do what you want in life. Do not ask me for money. Be fearless and may God bless you!
Then I came to the market with Rs 500. I had a bag. I used to stand outside the ring. If I tell everybody there that my father was in the income tax department, they would not talk to me. So I used to tell them my father had a shop in Mulji Jetha Market. My brother, who is a practicing chartered accountant, introduced me to some of his clients. They used to get 10-12% in the bank. I said I will offer 18% interest. So, I got my first loan. The lady asked for security. I said there is no security. So she said okay I will give you Rs 1,25,000. Then after 10-15 days (it used to take is days for clearance). I said you give me Rs 1,25,000 without security. I will give you Rs 1,25,000 more. That is how I started.
Another client of my brother gave me Rs 10,00,000 and in the first year itself, I earned Rs 25,00,000 after investing Rs 12,50,000. I remember, I bought the shares of Tata Tea and TCIL and some company made a lot of money. Then with all the money that I earned, I bought shares of Tata Power and this was in 85-86. For two-three years, there was no earning but I got married by that time. My father used to run the house and there was no need for money. Rs 2,000 ki cigarette daru woh nikal lete the. Toh samjhe na? Aur koi kharcha nahi tha (I used to manage Rs 2,000 for cigarettes and drinks. I had no other expense) . My wife came from a well-off family she is very simple and we managed. Then there was a rally in Tata Power shares and that investment got me a crore of rupees in 1988. Then there was Mr Sharma, who was very bullish on Sesa Goa, and he convinced me and I bought it.
That was your initial capital...
Yes, even I bought at least 10 lakh shares of Sesa Goa at Rs 25 on leverage. About 4 lakh of them I sold at Rs 65 in three months. Then I got the initial capital and Sesa Goa’s price was Rs 100.
I remember there was a strike by Nair in Telco. So, I and a friend of mine went there. We bribed the security, went inside the factory. Telco was Rs 96-97 when the factory was working perfectly and we bought a lot of shares of Telco and then the budget of 1989 came. That is when I really made my money. People were so bearish! We went to meet Nimesh Shah and he said the index is 600. If income tax is abolished, then index will go to 650 and it will come back to 500. They said Madhu Dandavate will impose a tax on education. If I send a child to private school, we will have to cut tax. But it was a coalition government. Education is a state subject. To impose that tax, he had to amend the constitution. For 25 crore, he was not going to amend the constitution for a coalition government. So there is no doubt that the level of despondency and bearishness was at its highest. Nimesh bhai was very bearish.
Are you seeing anything similar now, that despondency…?
Rakesh Jhunjhunwala: No not that kind of despondency. That despondency had to be seen to be believed. I mean, kisine Rs 400 ACC liya aur Rs 500 ka nuksan kiya, kyoki Rs 100 bhav ho gaya aur Rs 200 badla lag gaya (Someone bought ACC for Rs 400 and made a loss of Rs 500 because the price was Rs 100 and the interest due to badla was Rs 200). That was the kind of bearishness and that was the kind of money people had lost. Within three years, ACC sold at Rs 10,000. And mistake of my life... I bought everything, Telco, this and that.
I remember the budget used to come at 4 o’clock and 12 o’clock I got shit scared. I have got Rs 2.5 crore but maine kuch 25-30 crores ka maal vaida mein le liya and I said kuch galat hoga toh I will on the road (I bought Rs 25-30 crore worth on promise and thought, if I had it guessed wrong, I’d be on streets). I sold whole shares for Rs 10 crore, squared those shares in the evening. I lost at least Rs 2 crore in those shares. But next day, my net worth was Rs 20 crore. And then we had the rise. The Gulf War started and The Economist Magazine wrote an article – Has Dalal Street ever heard of Saddam Hussein? Because all the markets in the world know him except Dalal Street. So, we sold our positions on the top. We shorted, then again it came down. Then the Narasimha Rao government came. We had a run and we knew that this Harshad Mehta is a fraud and his money is not legitimate and the amount of money we made in the fall was enough.
You have publicly spoken about Radhakishan Damani being your mentor and playing a big role in your life. Who were the other people who actually influenced your thinking in early days?
First was my father because the basic values which I had in life -- the sense of independence and daring -- came from the basic human qualities that my dad gave me. Then Mr Radhakishan ji, Ramesh Damani is there, Kamal Kabra is there. My friend Rajiv Shah.
One thing is that all five-six of us always thought of doing right and we were parodied about the success. We never took it for granted. One thing which is very crucial is the mistake all of us made in midcaps. We extrapolated that profit of two years to the next 20 years without examining the business models. It is not the immediate which is important. Do they have the business model? Is the demand there? Is the barrier there? If the margin has gone from 10 to 15, is that margin sustainable.
We never extrapolate that maybe in 1988, my net worth was Rs 1 crore, in 1993, it was Rs 200 crore, but does not mean in 2000 it is going to be Rs 800 crore? In 2002 also, my net worth was Rs 250 crore. So, we cannot extrapolate things. You take success with paranoia and remember it is always transient and temporary. Always do the right thing and when you see an opportunity, do not do it today, do it yesterday. Normally in my portfolio, I carry a debt about 5%.
Between September 2001 and September 2003 I carried a debt which was at least 40% of my portfolio. But at what valuation were shares available? Great Eastern book value was 58, the certified fleet value, was 88. He used to give Rs 3 dividend on Rs 8 per share. And I must have bought 5 million shares at a price of Rs 25. So I used to borrow money at 9%...
All want to invest for long term, but you have this extraordinary sense of patience. I got to know you in those days. Even Great Eastern Shipping did not give you any return for eight years apart from the dividend which you made.
Not eight years, I bought in 2002-03-04. I sold in 2006-07 at Rs 150. So I did not…
Let us say that it did not give you return for a long period time. What I am trying to ask is what gives you that conviction to hold on the stocks for such long period of times?
I see no reason to sell share of companies in which I feel there will be no dilution of equity and there will be growth. If there is going to be growth, if there is a temporary upsurge in valuation, that does not mean that should be a reason for selling.
The other thing is I am not so smart that I can sell at high price and then there are cheaper companies, I will buy them. If have something good in life, I should stick to it. I sold all my public sector stocks despite making so much of money in Bharat Electronics and Bharat Earth Movers and Shipping Corporation. Why? Because these are large companies. But they need constant management and a certain valuation. They need dynamism.
But market goes through their own cycles. Even when we have winners in our hand, because of the market cycles and because of the pessimism, we end up selling stocks. But we have seen you kept on holding stocks like say Titan which would have corrected so many times, maybe 50%, What gives you that conviction?
Titan has given me 100% return in three years. Now if it gives me a 15-18% return after that year for the next three years, why should I sell? My expectation is not because I got this 100%, I sell Titan and I will search for the next 100% because that is not easy to replicate.
Second, it is not that I keep buying stocks to any valuation, does not mean that if I buy at a high valuation, I do not have the ability to hold on to it if the stock goes wrong. At the peak, I had 50 lakh Lupin shares. I sold 15 lakh. The stock had gone to Rs 2200 and today it is Rs 820. I did not sell it. I regret it.
But do you regret not selling it at 2000?
It is regretful that if three-four years later, the result shows. Something which is 820 and which was saleable… I sold 15 lakhs. The question is not that holding is always in your benefit. Just because I earned a large quantum of wealth, only the success stories are known. Nobody talks about my mistakes. Gaon hum ko shana samajhta hai, hume malum hai hum kitne gadhe hai (People think I am clever but I know how stupid I can be).. That is the reality of life. You have to examine…
Suppose we talked about Titan which is a success story and Lupin which you yourself said the stock is down…
No Lupin also, for me the cost of Lupin is Rs 8.
But the stock is down 60% from the peak. So what was your hypothesis for not selling it at that time and what is keeping you holding that company even today?
Lupin went from Rs 600 to Rs 2,200 in three years. My judgement says that Lupin will not penetrate Rs 1,400-1,500 on the downside and I am still holding on and longer term, I am very bullish on Lupin. I am bullish on the pharma industry and Lupin is one of the good players there.
Obviously all of us make mistakes and so you also must have made some mistakes where you lost a lot of money. What is the learning? When should you say that you have to cut your loss in this particular fund or this particular management?
First of all, life is not about regrets. Life is about learnings. I would like to learn from every mistake I made and I pray to God that I am not afraid to make a mistake. I also want to make one mistake which I can afford so that I may live to make another one. Because if I am afraid to make a mistake in life, I will be paralysed and I am going to make a mistake! Nobody is God, everybody is going to make a mistake. So see I am very, very kanjoos (miserly) investor in terms of valuations.