There may be a scope to debate on who is India’s second-best investor, but there is no doubt on who the best investor is. India’s ace investor big bull Rakesh Jhunjhunwala says he came to the market in 1985, but his first forward trade was in 1988.
For him, Sesa Goa was a breakthrough forward trade and investment.
At the LSE Conference, he tells students it is normal to be very tentative when you just start life. “When we look at a horizon we feel how distant it is. But when we cross the horizon, we find how many more there are. So when we start life, all of us feel we do not have anything, this person has this, you feel uncertainty, then you look at the horizon, you feel it is very distant. But life has taught me that when I come to that horizon, I realize how many more there are.”
Below is the verbatim transcript of big bull Rakesh Jhunjhunwala’s interview with market veterans Ramesh Damani and N Jayakumar
Damani: What are your thoughts about this LSE Conference that we are about to address.
Jhunjhunwala: It is good, it is always great to be with students and just as you always said that the future battles of Trafalgar are not going to be won in the waters of the Atlantic but in the playing fields of Eton. So, it is great always to interact with students.
I did fashion shows in London School of Economics and I am not saying it just for saying but for whatever reasons I couldn’t study there. However, it is great to be interacting with people from there today.
Jayakumar: It is kind of appropriate in today’s forum that we talk about education. You have had to an extent what you would consider education enough to make you sort of take on the world, a street fighter. People have run out of adjectives but do you have any regrets that you could have studied a lot more and become a lot less successful as a corollary?
Jhunjhunwala: I have no regrets in life about anything except my habits. So I don’t regret and I don’t think that education is what makes you – street fighters are born, they are not made because it comes from determination and guts. I don’t think the determination and guts come with education. Education gives me the ability to understand, education gives me ability to be civil and I think – I did chartered accountancy and I think it is one of the best education anybody could have. It is not a very glamorous education but it is a brass-tacks education and it made me understand financial matters, it also gives me understanding of law, which is very necessary. To interpret the Budget, you need to understand law; what the Finance Bill means? So I think I had that education which gave me the right cutting edge in terms of understanding and of course I am a street fighter.
I do not know whether it came with my education. Research shows formalized education takes away entrepreneurship because you reason and you analyze.
Damani: What were your first ideas, did you want to be a trader or did you want to be an investor?
Jhunjhunwala: I wanted to be an investor. I never thought I will trade but when I did not trade – I came to the market in 1985, I think my first forward trade in life I must have done in 1988. I leveraged because I had no capital. That leverage itself in a way is a speculative trade. The Badla trade or the Futures trade I did only in 1988 because I had earned money, I started with Rs 5000, by 1988 I had got Rs 70-80 lakh. How do I invest? I needed capital. My family won’t give me any capital. My father even if he gave I wouldn’t take, it is the costliest form of capital. So, I thought how do I get capital? I had Rs 70-80 lakh so I thought the only way I can get capital is by trading.
Jayakumar: What event kind of transformed this capital, whether it was a big trade or was it a big idea? What one event sort of transformed this into serious capital?
Jhunjhunwala: There were a serial of incidence. First of all I made about Rs 20-25 lakh in 1986. In 1985 I was worth Rs 5000. I invested that money, that money did not appreciate but gave me a dividend income of Rs 40,000-50,000 a year. Then that investment became worth Rs 80-90 lakh in 1988. That was shares of Tata Power , sole shares of Tata Power. Then we got very bullish on Telco. So, I did my first forward trade in life, I bought 0.5 million shares of Telco at Rs 90. In four months they were Rs 120. So, I was worth another crore.
Then we had a company called Sesa Goa.
Damani: That was a breakthrough investment, wasn’t it, Sesa Goa?
Jhunjhunwala: Yes, it was breakthrough forward trade and investment. Iron ore prices, at that time the Brazilians were the main exporters and the Japanese were the main importers, they used to set world prices and the prices for the next year were set in advance and an 18 percent price increase had been given in a commodity but people in India were just short selling Sesa Goa day and night including my good friend Mr. Damani and Mr. Kabra and I used to explain my bullishness and they used to laugh at me and there was one Mr. Bajaj in the market who explained to everybody but nobody would listen but I was convinced.
Damani: But you have also understood that the rupee would depreciate and that would be the bonanza?
Jhunjhunwala: No, never. My idea of buying Sesa Goa was, I bought at Rs 27-28 and I thought the price will be Rs 60-65 in a year and I will sell. Citi Bank was buying for Ruia’s because this was owned by an Italian company and they wanted to sell and Ruia’s wanted to get into iron ore. So, at one stage Mr Bajaj was buying, I had bought half a million shares and Citi bank was buying everyday for the Ruia’s and the price just flared up to Rs 65 in just three months and I remember the last, I sold bulk of my shares at Rs 60. I retained about 1,00,000 shares, the last 25,000 shares I sold in 1992 were Rs 2,200 and this made my net worth Rs 4 crore.
Then there was a Budget of Madhu Dandavate where everybody was so bearish as if there is no tomorrow and how education helped me, how knowledge of law that everybody would say and there were crazy thoughts that they will impose a tax on private education. Your son goes to Cathedral, you have to pay Rs 100 a month to the government. It is a minority government, education is a state subject, you have to amend the constitution. The government’s not for Rs 30 crore of revenue so, I thought people have gone berserk. Don’t forget that the first reform abolition of a state duty, reduction in direct taxes was done with the initiative of one of our former prime minister’s VP Singh and the people’s impression was that he will – and I knew that this fellow is a businessman although he is a Rajput. He will not give a Budget which will hurt industry. People were talking of increase in Minimum Alternate Tax (MAT) rates and he abolished MAT. People were thinking of hike in excise duty on aluminium, he increased the import duty on aluminium. So, a complete path breaking Budget and my net worth next day was Rs 20 crore.
Damani: One of the things that you are famous for on the street, you have many colorful sayings, one of them is ‘invest before you investigate’. The fact is that if you find something, go buy it and then do all the research. Is that still a driving force of how you look at markets?
Jhunjhunwala: Sometimes market gives such compelling opportunity like Dewan Housing . It had Rs 230 book value, 6 percent yield, 4 times earnings, growing at 20 percent for the last ten years, available at Rs 105 – I gave an order for 5 million shares, we will think about it later – such ridiculous valuations!!! I bought Lupin because I did not know what was ANDA, what was DMF but I knew one thing that Ranbaxy had earned Rs 250 crore in a single product. Lupin had the only injectable Cephalospor in approved FDA plant in Asia. They were the single filer for a product having a size of USD 360 million and the marektcap of Lupin was Rs 200 crore. What is there to think? So those kinds of situations are like invest now, investigate later.
Damani: Does the market then tell you also to back up the truck in these situations.
Jhunjhunwala: Yes and then you research later. I bought my first five million shares of DHFL and after I bought the next whatever shares I bought, I did a lot of further research. Today it is like meeting Aishwarya Rai, what are you thinking!! You date her without thinking.
Damani: Is that true also of the current Indian market? Do you feel that it is a, as you famously said, a buffet, you have got to choose what you have to have, are you that sanguine yet on India’s prospects?
Jhunjhunwala: No, I am not so sanguine. I am far more circumspect.
Damani: Why not?
Jhunjhunwala: Because valuations are not, DHFL today is Rs 525. So, there is a difference between Rs 125 and Rs 525. Today in the Indian markets what has happened that there the category of quality stocks whose valuations are unbelievable but quality also has a price and finally if I buy I do not think that how good a company, the long-term sustainable P/E is more than 25-30 times earnings and if I am buying P/E’s of 60-70 then if earnings double in last three years, ultimately as a long-term investor I am not looking for any price growth.
On the other side there is lower quality which is available but for that lower quality you will have to have a lot of patience. My saying is that by sheer valuations and the fact that the market had a run off from 5200-9000, I think market would consolidate here at this level rather than run away. Also the kind of volumes and the kinds of rises that we are seeing in individual stocks, it is indicative of the fact that we are going pause. The fastest, as the market moves higher the rise gets faster.
Damani: But bull markets can become irrational, if retail investors come back, won’t you see a huge run up?
Jhunjhunwala: You are such a good investor yourself, would you like me to participate in rationality?
Damani: But there is a section of market that is still cheap. A lot of the Nifty stocks are still below 2008 levels, right?
Jhunjhunwala: I look at it this way; in the trade I can do anything but am I going to invest at 60 times P/E, 70 times P/E? No and I won’t advise anybody. The second area are stocks which are cheap by historical standards and valuations but there is a question as to how well they will do? So now if you want to invest and you hope to have good returns, you have to go below the quality. You have to compromise quality.
Damani: Which you are not going to do.
Jhunjhunwala: I will compromise quality at a price. If someone gives me United Breweries and United Spirits at Rs 200 crore marketcap, I will buy it even today even with that kind of corporate governance.
Jayakumar: There is one section of the market — which is the space that you haven’t participated in, most of us haven’t maybe as a result of the fact that we think we don’t see earnings which is the e-commerce space where irrationality, one would argue, is at its worst ever. What is your thought process of that?
Jhunjhunwala: We don’t have to participate in every party.
Jayakumar: But is that party here to stay?
Jhunjhunwala: I know one thing – dot coms burnt away USD 500 million in the last six months of the internet boom. I think e-commerce will grow faster than what we are estimating but I don’t want to buy these kind of valuations. I agree with Ramesh, it may be smarter to buy service providers rather than buying these companies and I don’t want to participate in every party.
Jayakumar: But would you liken this party to the 2000 dot com burst?
Jhunjhunwala: You have any doubt?
Jayakumar: None of us do but irrationality of valuation at some point in time will catch up clearly.
Jhunjhunwala: Irrationality of valuation? Forget that, forget the valuation, where is the completed business model? I want to know Flipkart’s business model. You want to lose USD 250 million a year, where are you going? I want to know how you will be profitable? Second is if you look at any company in the world, the real companies who have given returns to investors have been built by cash flows of those businesses, not by investors’ money. When are these cash flows going to come? Look at Justdial; he changes his model every year. I am going abroad, then I am launching this product.
Damani: As I survey the scene today, the Nasdaq, 15-year high, Standard and Poor 500 (S&P), 15 year high, FTSE 100, 15 year high, Nikkei, 15 year high. So, you have called this the mother of all bull markets in India, but really it is a global bull market that is going on based on easy liquidity, isn’t it?
Jhunjhunwala: Have any two local bull markets taken place without an earnings growth. You tell me a sustainable bull market cannot take place in the absence of earnings growth. I agree that we have entered unprecedented era in financial history when money has been pumped but inflation has not come. In my personal opinion, if inflation does not appear, then there is no case to raise interest rates. So, interest rates will be low for long periods of time. But, I agree that equity is the preferred class or is in a bull market all over the world. But don’t you think without earnings growth somewhere it will clash? Somewhere it will stop?
Damani: But you are confident that earnings growth will come in India? Because you publicly said Nifty – 1 lakh.
Jhunjhunwala: I was not confident that earnings growth won’t come, I would not have 102 percent of my wealth in equity. I put my money where my mouth is.
Damani: I referred to it earlier, but in a conference which I attended, you called for Nifty in the six figure range, over 1 lakh. Currently, it is 9,000. What makes you so bullish on this country?
Jhunjhunwala: Where there is return on equity, then earnings growth is a function of nominal GDP growth. Suppose I keep on increasing earnings by injecting capital and there is no return on equity then earnings growth means nothing. Only when there is return on equity (ROE), then economic growth has to lead to earnings growth accompanied with ROE. Then only will the markets value it. China’s economy expanded, but market did not expand because ROE does not just go up.
Damani: Typically, this bull market can correct how much before you would be scared?
Jhunjhunwala: I feel like we have a bull market like we had in ’90, that the Dow never lost more than 10 percent of its value. Suppose Nifty goes to 9,500, it is at 9,000 today, anything below 8,000 would be worrisome. Even below 8,000, maybe my head is – I am not a bearish person. I was just telling Pranav, he send me a Whatsapp today that I had told him one day that Pranav we will tell people not buy shares and they will not listen to us. They will laugh at us.
Damani: That point has come already?
Jhunjhunwala: That point may not have come but if I were an investor, I would definitely wait.
Damani: Thank you for all your gyaan, but we want some specific answers so, are you ready for a rapid fire round?
Damani: What is going to happen first – Sensex 25,000 or Sensex 35,000?
Jhunjhunwala: Both have even chance. 50:50.
Damani: China 4,000 or Nifty 10,000 first?
Jhunjhunwala: I would think Nifty 10,000.
Damani: Brent going down to USD 40 per barrel or brent going up to USD 80 per barrel?
Jhunjhunwala: If you see the price movement, at the moment USD 80 per barrel is more likely than USD 40 per barrel. USD 48 per barrel is the last bottom. I don’t think it will break that bottom so easily. It may range between USD 48-50 per barrel and USD 65-70 per barrel.
Damani: You are a keen observer of politics in India so let me get you a few questions of that. Who is a better politician, Rahul Gandhi or Lalu Prasad Yadav?
Jhunjhunwala: Lalu Prasad Yadav.
Damani: Globally, who is a better premier, Vladimir Putin of Russia or Tsipras of Greece?
Jhunjhunwala: You are comparing a tiger to a rat. That fellow is too young. I don’t like Putin and his policies but that guy is too young and Putin is heads high.
Damani: Where would you put your money right now, largecap Indian pharmaceuticals or largecap Indian technology?
Damani: Midcap infrastructure stocks or public sector undertaking (PSU) banks?
Jhunjhunwala: Maybe both.
Damani: What would you rather do, spend an evening in a casino or have dinner with Warren Buffet?
Jhunjhunwala: An evening in the casino.
Damani: Would you rather have an afternoon with ascot races in England or spend a day looking at the World Cup?
Jhunjhunwala: Ascot races.
Damani: Your new passion is horse racing is horse-racing, isn’t it?
Jayakumar: Well horses for courses as they say and we finish with the question on your favourite thing. But coming slightly to the other side your favourite non-Indian politician of all time.
Jhunjhunwala: Winston Churchill.
Jayakumar: Your favourite billionaire of all time other than Rakesh Jhunjhunwala?
Jhunjhunwala: My favorite billionaire of all time. The man whom I admire. George Soros.
Jayakumar: Your favourite Indian Bollywood heroine of all time?
Jhunjhunwala: Sharmila Tagore.
Jayakumar: If there is going to be one sobriquet or a two letter phrase that describes you, would it be a compulsive finest investor trader of all time or would it be the inevitable billionaire?
Jhunjhunwala: I don’t believe the first. There have been better and finer people. Inevitable billionaire – ban gaya accidentally. There was no plan, I never in my life dreamt that I will have Rs 10 crore in bank.
Jayakumar: So, the inevitable accidental billionaire is a good way to wind up the… in all humility.
Jhunjhunwala: But I must also tell the students that all of us are very tentative when we start life. When we look at a horizon we feel how distant it is. But when we cross the horizon, we find how many more there are. So when we start life, all of us feel we do not have anything, this person has this, you feel uncertainty, then you look at the horizon, you feel it is very distant. But life has taught me that when I come to that horizon, I realize how many more there are.
Damani: Paul Farmer said it well in a book called Mountains Beyond Mountains.
Jhunjhunwala: This is my original thought. And I also tell them that dream. You will never achieve without dreaming. But dream with a head held high and your feet on the ground.
Jayakumar: And here’s to the multiple horizons going forward. We’ve had a great time.
Damani: There’s this old middle-eastern saying that keep your silver, keep your gold but give me your wisdom and you have given us ample of your wisdom.