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When Dalal Street’s original value investor prophesied doom for India’s capital markets

Sampat advised investors to keep their expenses low and invest only in a few companies.

Mar 05, 2019, 11.06 AM IST
An inspiration to several of today’s investment gurus, including Radhakishan Damani, Sampat made a powerful and everlasting impression as a master value investor.
Veteran stock market investor Chandrakant Sampat, often referred to as India’s original value investor, died at the age of 86 in Mumbai in early 2015.

But his value investing style, investment philosophy and wisdom remain alive in the hearts of many of his younger followers and some of the best minds on Dalal Street. An inspiration to several of today’s investment gurus, including Radhakishan Damani, Sampat made a powerful and everlasting impression as a master value investor.

Sampat’s road to glory
A man who preferred to stay away from the media glare, Sampat made his wealth by identifying investment opportunities in the 1950s after quitting his family business in 1955. Over the years, he made a mark as a man of resolute and rigorous discipline.

Sampat had a knack for holding stocks for decades, an investment practice that is unlikely to strike a chord with even the most patient of investors in today’s market. He amassed enormous wealth from years of careful investing by picking multibaggers from among multinational stocks. With the introduction of Foreign Exchange Regulation Act, or Fera, in the 1970s, which forced foreign firms to dilute equity at prices lower than their intrinsic values, Sampat quickly picked up multibaggers like Gillette (then Indian Shaving Products), Nestle and Hindustan Unilever even before they became investor favourites.

Before buying a stock, Sampat would weigh it on a rigorous scale of productivity and innovation. The constituents of his portfolio were constantly challenged against his metric and any stock that failed to meet the standards was removed from his portfolio instantly.

An avid follower of the Bhagwad Gita, Sampat often quoted shlokas from the great Indian epic and also condemned the conventional social system which he felt restricted the mind. “Markets and mistakes are best education. India’s conventional education just closes one’s mind,” he once said in an address to investors.

Drucker’s impact in Sampat’s life
One man who greatly influenced Sampat’s thought process and deeply inspired him was Peter F Drucker. Sampat frequently quoted him and was generally in agreement with the theories that Drucker has propounded.

Echoing Drucker’s perspective, Sampat once said, “If we achieve profit at the cost of downgrading or not innovating, they are not profit. We are destroying capital. On the other hand, if we continue to improve productivity of all key resources and our innovative standing, we are going to be profitable not today, but tomorrow. In looking at knowledge applied to human work as a source of wealth, we also see the function of the economic organization.”

Sampat's golden rule of investment
Sampat’s high success rate in the stock market can be attributed to the fact that he studied the fundamentals of a company clearly before making an investment decision. He followed some investment principles religiously, which helped him make great investment decisions and stay ahead of his peers. Leading modern-day investors still follow his investment advice to build multibagger portfolios.

Invest in businesses with little debt
An advocate of value and long-term investing, Sampat gave a lot of importance to free cash flow and longevity of a business for wealth creation. Also, he would advise investors to put money in a business that they had some knowledge about with either zero or very little debt.

“Invest in a business you understand, the company should have either zero or very little debt, the share should be available at a P/E ratio of 13 to 14 times current year’s earnings and lastly, it should be available between 3.5 and four per cent yield,” he used to say.

Pick good managements with share prices at 10-year low
Sampat was of the view that investors should pick shares of companies with good managements, when share prices are at an eight-year or 10-year low. He was a great endorser of the FMCG stocks and advised investors to pick stocks with least capital expenditure, where the return on capital employed should not be less than 25 per cent.

“Pick up good companies with good managements when their share prices are at an eight-year or 10-year low. Alternatively, if you still want to do something, buy stocks of good companies that are 40 per cent lower than their 52-week highs. I will buy only those companies that are in a business that even fools can understand, have very little debt, have free cash flows and do not have much capital expenditure, which is nothing but deferred cost,” he often said.

Keep expenses low
Sampat also advised investors to keep their expenses low and invest only in a few companies and keep faith in the power of compounding.

When Sampat turned bearish on market
Towards the latter part of his investment journey, Sampat became bearish on the stock market and kept most of his wealth in cash or cash equivalents. “There was a time when I had 70 per cent of my net worth invested in equity. Times have changed,” he remarked.

Sampat had deliberately stayed away from investing in the stock market as he grew critical of the policies followed by global central banks that had led to the rise in asset prices. Sampat was also unhappy with deteriorating corporate governance standards of Indian firms.

Sampat’s pessimism was also due to the fact that he wasn’t confident about the state of the Indian economy and thus, the fate of the corporate sector. He was worried about India’s growing fiscal deficit and felt that there was a scarcity of worthwhile investment options as many companies listed on the stock exchanges had negative EVA (economic value added).

Accelerating rate of technology threatening capital markets
Another major global trend that Sampat was worried about was the accelerating rate of technology that was threatening the survival of capital markets. According to Sampat, technological innovation was resulting in shorter business cycles, which were leading to shorter life spans for companies.

He believed in order for companies to survive this technology boom, they needed to generate cash flows in order to ensure that they were prepared for any new development that could alter the way businesses were running. This, Sampat felt, would leave lesser or no scope for capital formation as money would be used only for new technology and companies that were stuck with outdated technology would fail to survive. This, Sampat feared, could lead to a debacle for the capital market in the future.

And given his years of experience and amazing success in the stock market, even the best names on Dalal Street did not dismiss Sampath’s views or betted against them without giving it a second thought.

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