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Madhusudan Kela on what will determine your long-term success in stock markets

‘Valuation and management will always remain important’

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Last Updated: Jun 01, 2020, 11.56 AM IST
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ETMarkets.com
Madhu Kela2-1200
You have to have a certain set of principles in investing but you also have to be flexible enough.
Engage in trading only if you know how to trade, have the temperament for it and can devote your time, says the Market Veteran.

What have been our learning experiences from all of this?
Let’s talk about where we have gone wrong because we talk about learning all the time. I must admit we have played a lot of importance on what we learn, what is the information that we hear. But, at some point of time that information is your biggest enemy. Too much information can actually overcrowd your mind. The best of the investments are not being made by anything inside but it is being made by insight. Let me explain this properly. Inside does not take you any further, but insight will take you really long in the stock market. Right you know one of my big insights is understanding things all over again. When I started in 1991, it was only about valuing companies on the basis of asset valuation and that lasted for a few years.

Then there were a lot of smaller booms which came in between but in 1998, the clock turned completely and everything which was software, even small Hyderabad-based IT companies went up by 200% between 1998 and 2002. As long as the company was doing software, the stock was going up. Then, between 2003 and 2008, anything to do with the economy was doing well, whether it was metal, real estate, infrastructure or power. We launched a fund in Reliance thinking that we will get Rs 1,000 crore in power but we got Rs 7,000 crore. This is the power of the market. And then from 2009, pharma worked; Rs 1 lakh crore became Rs 10 lakh crore. And now for the last five years, governance, asset-like model, FMCG are working. Valuation will always remain important and management will always be very important.

The kind of business which you are getting in will also remain important. The point I am trying to make is that it is very easy to read the textbook and say we will only buy quality companies and if you are really headstrong person, you can maybe live with it but you will have to decide whether you are that person because if you were that person between 2003 and 2008-2009, your returns would have been absolutely disastrous. Go back and see what was the return on Nestle or Hindustan Lever between 2003 and 2009 and you will learn it. Everyone has to have an individual way of conviction. What suits me is you have to have a certain set of principles in investing but you also have to be flexible enough.

I must again admit that even after understanding that this is going to do well, it can only form a portion of your portfolio. It is not that you can make 100% of your portfolio into stocks like that. So if I had only 5% in real estate in 2003, it would have become three times of my overall portfolio between 2003 and 2008 and if I had by conviction and if I had added 30% in real estate in 2009, by now it would have become 1%. Ultimately you need to understand what the environment is but what kind of capital you are allocating at what point of time in what kind of sector will really determine your long-term success.

A lot of people think that trading in the stock market is easy. Even somebody like Rakesh Jhunjhunwala says that he has made his wealth by trading. What has been your experience of trading? Should people indulge in trading?
After I left my job, I tried it. Yes, trading is a full time activity. To be a really smart trader, you have to be really smart and trust me it is not easy. Again in hindsight, it is all easy but I have seen a lot of people trying to trade, but it does not work. You have to again understand, are you a trader by birth? Do you understand markets? Do you have the understanding of where to keep the stop loss and where to trade big? If you are that kind of a person, then obviously by all means go for it. This market is trading Rs 25 lakh crore and with the kind of fluctuations which are there, if you are a good trader, you can make a fortune. But it is not for everyone.

What I am trying to emphasise again is that do not try to duplicate things. Don’t think if Rakesh Jhunjhunwala made money trading, I can also make money. The skill set of Rakesh Jhunjhunwala is different and you have to acknowledge that. So if you know how to trade and you have the temperament and most importantly, if you can devote your time, you can do it. I do not think trading is a sin. If you know it, you should do it but I do not know it and whatever little I have tried to do has been a disaster.

There are a lot of examples that are the flavour of the season. Markets always follow a cycle; so how does one know this is the flavour of the season and this is not or what is the right time to sell. Selling is more important than buying. Right now pharma is an outperforming sector and people will buy pharma but what is the good time to understand that this is the fair value and this is not the fair value and it is time to sell?
There are three components; let us break it. One is buying, which I told you is easy because you can find buying information from anywhere. Second, how long can you hold a particular stock? Can you hold it for three years? Say you bought Unitech at Rs 10 crore marketcap. It went to Rs 1 lakh crore marketcap. If you bought it at Rs 10 crore marketcap and you sold it at Rs 100 crore marketcap, you still made a 10 bagger; if you sold it at Rs 1,000 crore marketcap, you still made 100 bagger; if you sold it at Rs 10,000 crore marketcap, you made a 1,000 bagger. But actually it became a 10,000 bagger.

From my experience, I can tell you that buying is very easy. But the conviction to hold can only come from two things. One is your understanding of the market, which is a softer aspect and second is the kind of work which the company is doing. If we take Unitech’s example, the stock gave you enough evidence; you are a real estate company, you do not raise money, you went into telecom, you went into an overbought zone and you started leveraging. Market gives you ample examples but it is only true in hindsight that I could buy it at Rs 10 crore and sell it at Rs 1 lakh crore, but it doesn’t happen generally. But if you bought it at Rs 10 crore m-cap and sold it Rs 50,000 crore m-cap, it is still a lot of money and that is the distinction between successful investors and not-so successful investors.

If I get another opportunity to invest in a Unitech-like company, I would but will I buy an absolutely bad real estate company? I would not because at that time, the perception of the Unitech promoter was still good and it had a strong business model when the story began and it became stronger by years.



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