Value-Stock-Plus

Rakesh Jhunjhunwala Portfolio – October 2011

Saumil Mehta — Mon, 10 Oct 2011 04:24:59 +0000

Will US have its ‘Sputnik Moment’ again?

Saumil Mehta — Mon, 08 Aug 2011 14:41:04 +0000

Mr. El-Erian of PIMCO, says in this article that US will require a ‘Sputnik Moment’ again to regain its lost glory.

He also says that there is no one to step in US shoes. And, though world has to live with the downgrade, at core US will still be Triple-A.

Can US do it again?

Lets see…

Sputnik Moment

“Sputnik Moment” — is a visible shock to the national psyche that can unify Americans around a common vision and a renewed sense of purpose — that of halting gradual secular decline by putting the country back on the path of high growth, job creation and financial soundness.

It started with the Space Age and later ended in the Cold War between the US & The USSR.

However, I second his views on the ‘Sputnik Moment’.

Year was 1957

There are two points to be considered here:

In 1957, US GDP was roughly at $460B against external debt of $270B which amounts to Debt to GDP ratio of 58%.
US had Gold Standard then which was in effect till 1971 when President Nixon approved to delink dollar from Gold.

Now considering point 1, US had an enormous fiscal clout then to start a space age to compete with the USSR as Debt to GDP ratio was roughly half of total GDP. And due to this the fiscal position never went out of hand until 1971 when Gold Standard against which the US dollar was pegged was abolished and the US government had a free hand to print greenbacks at will.

2011 is not 1957

It would be difficult to have a ‘Sputnik Moment’ now. Nothing comes for free and to have that New Era, US does not have enough fiscal elasticity to move forward. The only option it seems now is to just print more money which of course will do but in return will see debt piling up further (read: debt trap).

Silver Lining

One thing US has in its favor is that US has taken debt in its own currency so in future if and when fiscal position improves, US wont have to repay by selling its currency. Moreover, US also does not have to worry much about depreciation of its currency as major holders of US Treasury bonds (China & Japan) wont allow that to happen as it would hurt them most as it will lead to a depreciation of their bonds.

Final Thought

No one likes ‘hero’ of a movie to be in trouble and same goes for US also. A prosperous US means prosperous World. But one thing is certain – There would be gradual decline of US’s economic clout. Of course, there is nothing to worry about its position for next few decades but its position would be something akin to Microsoft of 2011. With companies like Google, Facebook & Apple in the picture, Microsoft’s position has greatly been compromised.

Same could be true for US also…

Large but not important…

- Saumil Mehta

The US Debt Trap

Saumil Mehta — Mon, 08 Aug 2011 07:03:22 +0000

I don’t control, I grab the opportunity: Rakesh Jhunjhunwala

Saumil Mehta — Mon, 06 Jun 2011 06:01:41 +0000

In 1985, when Big Bull Rakesh Jhunjhunwala entered the market with Rs 5,000 as his initial capital, his dream was to earn about Rs 1 lakh a month. Now after journeying through a little over a quarter a century, even the man himself doesn’t remember when he had crossed that dream to enter into the current realty of probably earning much more than a lakh of rupees every hour.

So when we meet the last Big Bull of his generation at his 15th floor office at Nariman Bhavan in Mumbai’s central business district of Nariman Point, naturally a good part of the conversation is about his wealth along with others like the ethics, tricks and the secrets of the trade.

Although various estimates put his total wealth above $1 billion, 51-year-old Jhunjhunwala wouldn’t reveal a specific number. Instead his answer is a rather diplomatic and prosaic; “I have far less wealth than people think but I have much more than I need”. But he is candid enough to add that the first time he was listed among the country’s richest, his father, a tax man whom the junior Jhunjhunwala idolizes, was happy about his son’s achievements. “He asked me to use more of it for charity,” he says adding that that is something he has been trying to do seriously.

Whatever be his net worth, the fact remains he is the most watched man on Dalal Street. People want to know what he is buying, what he thinks of the market trends. At times there is an ‘irrational exuberance’ in a counter just because it is rumoured that Jhunjhunwala is interested in the company and its business.

It was Sesa Goa and Tata Power that he started off with in the mid-1980s, Jhunjhunwala reminisces, sitting across the corner office, which surprisingly doesn’t have any TV. What it has, however, is a lovely view of the Arabian Sea.

That’s where Jhunjhunwala, a trained chartered accountant, tasted the smell of money. Crisil, Titan, Praj Industries are some other stocks in which he has made loads of money. So is there a common thread to his stock selection? It’s his knack to pick stocks with strong under-valuations and long-term prospects. At present, “retail and banking are the sectors to watch out for,” he revealed. Rather strange for a man who is known not to reveal any of his bets.

Although considered to be a Big Bull on the Street, unlike some of the discredited players in the past who also carried the same title, Jhunjhunwala doesn’t want to control the market. To a pointed question that how he is different from them, he said; “I don’t want to control the opportunity. Rather I grab the opportunity”. “Greed and immaturity are the two things to avoida¦ I would never manipulate a stock. I know the road to Arthur Road Jail and I would not like to take that path,” was his admission about his approach to the market. And since opportunities don’t come regularly, by his own admission, wealth has come to him in spurts. “It doesn’t come when you deserve it,” he says taking a deep puff on a cigarette.

So we ask him what we believe many have asked him before: How does he select a stock before investing in it? There are several parameters, Jhunjhunwala says, handing out a booklet. First is to look at the opportunity. Infosys in IT, Titan in consumption, Colgate in toothpaste are some of the examples here. Then one should look for competitive advantage, like capital, branding, location, etc. “The third thing is scalability. A friend asked me do you invest in large cap or small cap. My answer is I invest in a small cap which will become a large cap. There the scalability is the key,” Jhunjhunwala said. The quality of people which is difficult to judge, and the ability to generate cash are the other considerations. “And above all, it should be available at a good price,” Jhunjhunwala added.

But besides the fundamentals, what is the underlying philosophy of his investments? “We invest out of ignorance. We invest in the future which is uncertaina¦ we invest in the realms of possibility,” he said. “I invest in 25 different businesses and I can’t understand them all. We go by our basic understanding. All these (investment) judgments are with half knowledge,” he adds. So does luck play a part? “I believe in one thing: What I am today is because of the grace of god and blessings of my elders,” he confesses.

Jhunjhunwala literally needs something to chew on while we talk. So in the middle of a couple of smokes and a round of coffee, he digs into a plate of assorted Gujarati snacks (including fafdas), followed by a plate of neatly cut apples, and rounded it up, like a good Indian meal, with a paan.

So what next for the man who made millions on Dalal Street? “(Now) the dream is to replicate internationally what I have done in India,” he said. So probably, Wall Street and the City of London should prepare for the arrival of brand Jhunjhunwala.

Over the years, how many mistakes has Jhunjhunwala made? “I have made many more mistakes than people know.” Some of those were while investing in unlisted stocks, currently in terms of value which constitute about 15% of his wealth. We shift the conversation on to his recent efforts to sell the A2Z Maintenance & Engineering story through its IPO, in which he was one of the investors for the last few years and offered some shares in the issue? “The market rejected what my view is.” Although he has other unlisted companies to take public, he has vowed not to offer for sale any shares in any future public offers. Another mistake, he says, is not taking care of his health the way he should have.

Lately, charity is the ‘in thing’ for the world’s super-rich, thanks to Warren Buffett . What’s Jhunjhunwala’s take on this? “For me good deeds and charity are done not to bring in good luck, but they are duties.” He supports a home for poor children in Bangalore.

During Buffett’s visit to India, Jhunjhunwala was among those select few who had a private meeting with the chief of Berkshire Hathaway . Was there any rub-off effect on him? “After meeting Buffett, and Bill and Melinda Gates, my charity quotient has gone up substantially”. He says he intends to give ‘a good percentage’ of his wealth to charity. But how much is ‘a good percentage’? He won’t give a number, but adds, “My wife is an equal partner in our wealth and I still have to discuss this matter with her.” Given that charity is a flavour of the season, it wouldn’t perhaps be too long before the man, who by his own admission has enough for himself, to loosen his purse strings.

India’s Warren Buffett Reveals His Secrets

Saumil Mehta — Tue, 05 Apr 2011 08:25:15 +0000

He was dubbed by media as India’s greatest investor, the Oracle of Mumbai; Rakesh Jhunjhunwala is an Indian Chartered Accountant by qualification but an investor/trader by profession. In 2010, Forbes rated him India’s 51st and the world’s #1062 richest man with wealth of $1.0 billion. Much like Warren Buffet, he buys into the business model of a company by judging the longevity and growth potential. He gives top priority to “competitive ability” and “management quality” of the enterprise. But Rakesh’s investment mantra took some interesting turns for growth, with a subtle endorsement for “momentum,” a dirty word for many die-hard value investors. Here is a summary of Rakesh Jhunjhunwala’s version of intelligent investing based on his talks over the years. FOCUS ON THE “COMPETITIVE ABILITY” OF THE BUSINESS

Market Forecasts… Does it work?

Saumil Mehta — Wed, 16 Mar 2011 12:01:01 +0000

Sixth-century BC poet Lao Tzu remarked that “those who have knowledge don’t predict” while “those who predict don’t have knowledge”. So if forecasts are so useless, why do we spend so much time making them and reading about them?

Apple Inc: The Greatest Turnaround in Corporate History

Saumil Mehta — Tue, 08 Feb 2011 07:35:12 +0000

Some fun facts about Apple’s turnaround:

+8,524% (37.7% annualized): Stock performance since Steve Jobs’ return to Apple in 1997.
+821% (18.6% annualized): Revenue growth since Jobs’ return.
+5,093% (66.4% annualized): Stock performance since the launch of the iTunes Store in April, 2003. (A disruptive innovation.)
+951% (39.9% annualized): Revenue growth since iTunes Store launch.
In the last 8 years, revenue has grown by $60 billion (1,000%). 73% of that growth came from newly launched products.
In the last 3 years, revenue has grown by $40 billion (165%). 60% of that growth came from iPhone sales.
$220 billion: Amount of products sold since the release of the first iPod.
$19 billion: Apple’s cut of all sales through the iTunes Store, plus Apple iPod accessories (currently $5 billion a year).
298 million: Total number of iPod units sold.
90 million: Total number of iPhone units sold.
If the cash and securities on Apple’s balance sheet (~$60 billion) was turned into a hedge fund, it would be the biggest in the world.

What is Value Investing?

Saumil Mehta — Wed, 19 Jan 2011 14:01:33 +0000

Making Sense of Market Forecasts

Saumil Mehta — Wed, 12 Jan 2011 16:44:23 +0000

Most prognosticators miss the mark—but there are ways you can profit from their predictions.

By JASON ZWEIG

Every January, hordes of highly paid experts attempt to predict what the economy and the markets will do in the coming year. Later in the year, nearly all of the forecasts turn out to be wrong.

Here, we hope to offer something different: a blueprint for how to make practical use of these predictions, even when you suspect they are wrong. Taken together, forecasts can point toward the best and worst outcomes you can reasonably expect in a given year—and tell you how confident you should (or shouldn’t) be.

Forecasting is as old as markets themselves. Records from ancient Mesopotamia, according to research by historian Alice Louise Slotsky, are full of references to omens that were believed to predict commodity prices, such as “the raven is for a steady market.”

Practically ever since, pundits have been pumping out forecasts—and missing the mark. Think back over the past year, when technical indicators called the “Hindenburg omen” and the “death cross” were said to predict that stocks would collapse, China’s stock market was expected to keep booming and a “double dip” recession in the U.S. looked likely to many market experts. So far, at least, none of those things has happened.

If the forecasters are right for this year, then U.S. stocks will go up roughly 10%, 10-year Treasury yields will run around 3%, inflation will be a bit under 2%, and the economy will expand 3% or so. Yet it would be naïve to think you could bet accordingly.

Why do people with years of experience, massive expertise and mountains of data at their disposal so often get the future wrong?

First and foremost, the future is the realm of surprises; no one, no matter how expert, can reliably foresee what will happen and how people will react to it. As the economist Friedrich von Hayek said in his lecture “The Pretence of Knowledge” when he won the 1974 Nobel prize in economics, “in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable.”

The trap called guaranteed NAV

Saumil Mehta — Wed, 29 Dec 2010 16:45:55 +0000

It is guaranteed,” said the relationship manager (RM), stretching the ‘ees’ for emphasis. He needn’t have. I got the idea, or at least, pretended to. The guaranteed- NAV Ulip (unitlinked insurance plan) would ensure that I earn the highest returns the market delivered during the tenure of the policy. A false smile in place, I sat back on the plush couch of the private sector bank.

Ostensibly, I was digesting the implication, guaranteed returns from an equities instrument for 10 years. The absurdity of the promise was clear. How are investors misled so easily? Don’t they crunch numbers or ask how the insurance company will assure high returns consistently? Oblivious to my thoughts, the RM had ordered two cups of coffee and the application form of the Ulip. May be it was my imagination, but his smile seemed smug.