Rakesh Jhunjhunwala, a name that needs no introduction, was one of the best investing legends. Popularly known as the Warren Buffett of India, Jhunjhunwala was always extremely positive about the prospects of India.

Most of his stock picks were based on the assumption about India’s rapid transformation and growth. While he was a long-term investor, he indulged in short-term trades as well.

He dared to trade against market sentiments and built huge positions to support his conviction. Trading when others fear, Jhunjhun-wala made handsome profits from his contrarian approach.

• Most of the trading profits were re-harvested back into buying or adding some fundamental stock picks in which he was extremely convinced about the prospects, management and opportunity.
• Rising from merely `5,000 when he started his journey in the stock markets, Jhunjhunwala ’s holding and investments in the stock markets were worth around `46,000 crore at the time of his passing.
• He believed in multiplying wealth by combining short-term trading with long-term investing. Starting with a minimal capital base, he was able to build a massive portfolio worth thousands of crores.

All this was achieved by betting big on high conviction stocks, being positive about India’s growth prospects and taking calculated trading calls. Let us take a look at his investment philosophies

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• Buy Right, Sit Tight

Jhunjhunwala believed in ‘buying right and sitting tight’. This means conducting your own research, buying the right stock and then waiting till an opportune time comes. If investors carry out their research, they will have faith in the company’s business. Investment decisions should never be affected by the panic created in the market.

According to him,

• Discovering the value of the company is more important than the stock’s price. Investment decisions based on value discovery tend to deliver solid returns over the long term.
• And most importantly, holding them over a very long period. He held on to some of his multi-baggers like Titan, Crisil and many others through different business and market cycles, and stayed away from temptations and fear produced by the markets.

 

• Three Pillars Of Investing -External Opportunity, Competitive Ability, And Scalability

Jhunjhunwala emphasized on three pillars of investing – external opportunity, competitive ability, and scalability. For him external opportu-nity is very critical when making investments for the long term.

Assessing the market potential and addressable market of the product which the company makes was an important criterion.

 

In a media interview, he had said “While predicting a company’s profit, I follow the following: The addressable external opportunity available to the company, the scope of demand for the product or service of the company, determines its addressable external opportunity.”

Second, he preferred companies with a high competitive advantage and a durable business model. When you invest for the long term, you not only need potential and competitive advantages. Companies with huge potential but least competitive advantage could be a disaster.

He once said,

• “Invest in companies which have strong management and competitive management.” Finally, is it scalable?
• An investor should be able to answer these basic questions: How sustainable is the business? How long is the runway?
• Does the business have an effective moat or a near monopoly? Is the business in the industry, which is highly dependent on political power?

 

• Never Invest At Unreasonable Valuations. Never Run For Companies Which Are In Lime-light.

Investors should never consider unreasonable valuations especially in companies which are in the limelight or fashion. Jhunjhunwala followed the principles of value investing, i.e., purchasing a stock at a price lower than its fundamentals. Investors should be opportunistic and do their homework thoroughly.

• We should invest “when the stock is not popular”, that is it is being overlooked by other investors. This should allow an opportunity to buy at a very attractive valuation. He believed that the market price of the share is nothing but the function of EPS and P/E ratio.

• Valuation Is Partly Science But Mostly An Art

Valuations have been the center of his investment philosophy and success. While calculating EPS is easy, the difficulty arises from predicting expectations and determining the PE ratio of a company. He once said in an interview, “I believe the prediction of EPS is mainly science and partly art but the prediction of price to earnings ratio is art with very little science.

It is a chemistry that can be mustered only by experience. I learnt that under-standing or predicting PE is the most difficult of all the most critical factors of successful investing.” Jhunjhunwala suggested, “The ingredients of successful investing lie in locating gaps between current expectations and future likely performance, which provide for available odds as an investor.”

He also suggested: 

• “Perhaps the single biggest error in the investment business is failure to distinguish between knowledge of a company’s fundamentals and the expectations implied by the stock price.
• When a company has strong fundamentals, investors tend to buy irrespective of expectations. Similarly, weak fundamentals cause investors to avoid the stock.
• This tendency leads to an inability to properly calibrate the odds, producing sub-optimal performance. The issue is not which stock will be the winner but rather which companies are available at a valuation that promise superior returns.”

 

• Margin Of Safety .

Jhunjhunwala has always focused on maintaining a significant margin of safety just like other value investors. He was willing to invest in those stocks in which there was a possibili-ty of significant upside. Trading taught Jhunjhunwala the importance of ‘margin of safety’ and this gave him a sense of right valuation.

Most of his investments happened at stressed valuations where there was a huge discount because of the apprehensions, weakness in the markets and any other short-term issue that brought down valuations to attractive levels. Once he built a huge position in the listed exchange MCX, which then had fallen from around 1,300 to 100 a share within a span of a few trading sessions as a result of NSEL scam and its links with the promoters.

Eventually, the stock survived and he made a large sum of money buying for the long term.

• The Basic Value Is Important; Investigations Can Follow

Many a time, Jhunjhunwala’s approach was to invest, then investigate. Later, when he was convinced, he used to add to the position. Here also, valuations play a critical role as adding a position at increased prices is an extraordinarily hard thing to do.

For example,

• He invested in McDowell just by looking at the basic value. When he invested, this company was controlling a 40% market share. The liquor market has a very high entry barrier. At that time, the market cap was valuing the company at around `200 crore.
• He said, imagine buying 40% of the liquor industry at just `200 crore. Therefore, once the basics are right, you do not need super intellect and research. Jhunjhunwala said, “Investment has to be a broad decision. It is not a mathematical decision. Investment is wisdom and not intellect.”

 

• Never Get Emotional When It Comes To Investing
Jhunjhunwala followed this princi-ple: “Emotional investment means you will definitely make a loss in the stock market.” Emotions could be a big hurdle in making good decisions.

He separated emotions, which he said are difficult to practice, but are critical to success. Playing against the crowd and dealing with greed and fear cycles constantly means making an independent mind and judgement, which is not influenced by emotions.

 

• Knowledge Is Critical; Learn From Mistakes

In 2005, Jhunjhunwala sold `27 crore worth Crisil shares and then bought a flat in Malabar Hill, Mumbai. Later, he sold that flat at a significant price.

He said that flat would have cost him `80 crore to `90 crore. But if he hadn’t sold Crisil shares of `27 crore, then the shares would have been valued at `700 crore to `800 crore.

However, he never regretted any of his mistakes. He used to learn from them. He used to say that there is no point in arguing with the market.

He was a firm believer in this principle. “Respect the market. Have an open mind. Know what to stake. Know when to take a loss and be responsible.”

 

• Invest In Business, Not In Stocks

Jhunjhunwala used to say, “Never invest in a stock. Instead, invest in a business.” According to him, investment should be made in a business that one understands. Therefore, behind every stock, there is a company. Know what the company is into.

The idea is to know more about the company and management than to stare at share prices and other market-related information. Eventually, a good company having strong management should result in significant gains over the long term.

He once said, “We can predict future prices by predicting future EPS and PER (price-to-earnings ratio) but to predict future profits, we need to understand real-life business.”

 

• Never Depend On Historical Data And Take Your Time To Think

Jhunjhunwala had this view of never depending on historical data. Investors should never take present decisions based on past performance.

Understanding the market completely is of utmost importance. Depending on historical data can bring in emotions and irrational thinking.

One can sometimes be overly optimistic and stick to non-performing investments. Investors should be aware that stock markets are very sensitive.

Jhunjhunwala used to say, “Hastily taken decisions always result in heavy losses. Take your own time before putting money in any stock.”

• Management Quality + Integrity Equals A Solid Leadership Team

He advocated that the very first step towards investing is to understand and examine the quality of the company’s management. Once you are invested as an investor, you are the part owner of the company. And you would surely not like to be with someone unethical. Hence, capable and trustworthy management is a must.

 

• Patience Is The Key To Success In The Market
He always emphasized on being patient in the stock market. Nobody can become a money magnet in just a few days. Years of research and due diligence are the critical parameters which are required.

The bottomline is that if an investor believes in a particular stock, he/she should stay invested throughout the highs and lows of that company.Jhunjhunwala’s portfolio had corrected multiple times.

But he used this as an opportunity to buy new stocks or add positions in old ones. He advised investors to never engage in panic selling.

He used to say, “Stock markets are always right. Never time the market.”

• Contrarian Investing
“Buy when others are selling and sell when others are buying” was the principle Jhunjhunwala lived by. Jhunjhunwala used to go against the tide. He was always against the herd mentality. He used to say that in the market, investors should use their own brains.

By going against the tide, investors will be able to benefit. When everyone sells, there will be a downturn. This will lower the valuations of fundamentally-sound companies. Thus, buying these in the long-term will benefit. Jhunjhunwala once said, “Anticipate trend and benefit from it. Traders should go against human nature.”

 

• Use The Leverage Strategically
Jhunjhunwala’s interest in stocks began when he heard his father discuss markets with some of his friends. When he started dabbling in stocks, it was very small.

Scaling the portfolio merely from his capital was a big challenge or almost impossible. He brought the idea of leverage.

He was contrarian and made big profits from some of the investments and trades that he carefully nurtured. And being extremely mindful of the risks, he used financial leverage to increase his position. In the end, the returns were much higher than the interest, which he used to pay and that helped in scaling faster, thus helping him accumulate huge wealth.

 

• Invest Only When You Are Convinced
Jhunjhunwala is quoted as saying, “Don’t spend money looking at others. Conduct your own research.” This means investors should not invest just because people around them are investing.

Researching on a personal level is very critical. Since it is investor’s wealth, the liability of the loss and the credibility of the profit should be given to that investor.

Therefore, investing without research and without knowing the company could be a mistake. And in the end, it is all about conviction. His success is attributed to his conviction and conviction cannot alone be built on borrowed ideas and wisdom.

He argued that one will have to learn and take responsibility for his or her losses and profits, which is only possible if he or she knows what the person is doing and why he or she is doing it.

• Art Of Exit
By sitting tight for the long term irrespective of market fluctuations, Jhunjhunwala held his stocks for a really long term.

Like entry into a stock, Jhunjhunwala has his own art, which he explained by saying, “Exiting a stock is an independent decision not driven by profit or loss. I sell if I judge that I have better competitive opportunities.

Since price equals EPS multiplied by PE, I would also sell when EPS that’s all expectation about the EPS of a company is coupled with unreasona-ble PE ratios.”

“Value and valuations are both transitory and have no definite benchmark. I am not in the camp that says that you should stay just because the stock has historically expensive valuations.

I evaluate the technical position in a stock when exiting as one can never predict the limits of extreme behaviour. “Technical analysis helps me to sell beyond the fair value in case equity overshoots.

While I don't try to sell at the top, I do aspire to capture overshooting beyond fair value,” said Jhunjhunwala. The man with the Midas touch may no longer be with us. But his investing lessons and legacy are forever eternaL.

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