With just proper strategy and tactics a ₹5000 worth portfolio investment can be made as big as ₹2 billion worth of portfolio.
The above statement might seem unbelievable, but people like Rakesh Jhunjhunwala, Dolly Khanna (Rajiv Khanna), Ashish Kacholia, Vijay Kedia, who are known to be one of the most successful investors in India, have actually turned the tide and have created phenomenal fortunes from the market.
Talking about Sensex alone, it has shot up at a good pace from 1000 in 1995 to almost 36,000 in 2018. This signals strong and mature financial markets in India, with a healthy cumulative return of 16% over a period of 23 years.
Still investing in Sensex would have earned only 36x – 40x return, the question then boils down to how to earn 4000x as people named above, also labeled as ‘Oracles of Omaha’ of India have done.
Let’s explore the philosophy, style, and investment strategy of such successful stock market investors in India.
Style of investments refers to stock selection in a portfolio based on the very nature of the stock or the company they represent. Every stock can be broadly classified in 4 major styles
These are the stocks that are viewed to be currently undervalued by the market. Their current market prices are much lower than their fundamental numbers like Price/Earnings, dividends, sales or even assets managed.
These stocks have high dividend yield, which is a ratio of dividend paid by the company to the current market price. Also, they have a low price to book value or low P/E.
These are the stocks which are anticipated to grow much faster than their peers. One of the characteristics of these stocks is that they don’t pay dividends, this money is reinvested into the company for growth.
Growth stocks are comparatively riskier than value stocks as there is no dividend. There is no bird in the hand, they are still there in the bush.
There are also other styles like momentum, volatility, etc. which are more suited for short term holdings in stocks.
A general perception might instill that one should go for a value stock.
Moreover, the perception also extends to a fact that people like Jhunjhunwala and others have some innate ability to identify a large and mid-cap value stock which has grown phenomenally providing almost 100 times return in a span of 5-10 years or so.
The above style was adopted by Warren Buffet. Buffet’s value portfolio performed much better than growth stocks for the period of 2000-2013, but if we consider a shorter time horizon growth stocks had actually beaten up value stock for the period 2007-2013.
Even if we consider a proxy as fund performance, recently value funds have delivered -15% return, whereas growth fund has posted almost +20% return. Whereas losses in growth stocks have hit the portfolio more badly as there are no promised dividends and everything earned is reinvested. These reinvestments in growth stocks may compound the impact both in time of the positive and negative story.
The focus now boils down if both value and growth are somewhere better than the other, should one invest in blend style which is a mixture of growth and value both.
When a stock becomes a part of the Dolly Khanna’s portfolio it’s almost deemed that the stock will turn into a multi-bagger.
Dolly Khanna and her husband Rajiv Khanna stated their investment journey after selling their company Kwality ice-creams to Hindustan Unilever. Their portfolio is worth more than ₹1000 crore now.
The investment philosophy of the couple or rather the wiz Rajiv Khanna (the man who actually is a think tank for stock selection) is capturing growth companies in the small and mid-cap sector. They hold the stocks for a long time and let the business flourish, which then levers the stocks to a multi-baggers category.
Thus style block as discussed earlier for Khanna couple is Growth – Midcap, with little dilution towards the small cap.
The identification of the stocks is generally based on companies, who show great potential for growth. These companies are identified in the early stage of the business life cycle. However, the portfolio of the Khanna couple shows a slight affection for manufacturing, agricultural and chemical based companies.
Khanna couple almost revises their holdings every quarter, recent additions to their portfolio was Radico Khaitan and Som Distilleries, alcohol-based stocks.
Rajiv Khanna strictly believes that value investing style is something to move on with, he focuses growth over Value style.
Rakesh Jhunjhunwala (RK) strongly believes in India’s growth story and patience in the market.
He also believes in learning from one’s own mistake. He invests in stock seeing the underlying company and not the price volatility or big swings a stock might exhibit in the market. The price fluctuations are short term phenomenon and should not press the panic button in times of low stock performance.
Jhunjhunwala first makes a thorough analysis of the company’s growth and financial strategy. If the strategies are too complex, the company doesn’t qualify for Jhunjhunwala’s portfolio. The company may qualify in Small Cap, Mid Cap or even Large Cap. The only criterion for selection is a convincing growth story and the potential of the company.
Time horizon is one of the pillars for his strong return. Talking about the holding period, an average equity fund holding period is about 9 months to 1 year. However, Jhunjhunwala’s holding period on an average is 3.44 years. Some of the stocks like Titan, Crisil, Lupin, etc. has been glued for more than 10 long years in his portfolio.
Lucrative Initial Public Offerings (IPOs) do not move waters easily for Jhunjhunwala.
Both Jhunjhunwala and Warren Buffet have shared almost the same investment philosophy of holding tight and continuously grabbing the opportunity, value style investment. One of the differences in the philosophies is that Jhunjhunwala believes in financial leverage, i.e. getting debt for investments whereas Buffet doesn’t encourage leverage.
Jhunjhunwala started his initial investments with a conservative portfolio that can be expected from any new entrant. He had heavily invested in blue-chip companies like Tata Power. Gradually he then moved to a mix of both growth and value or blend styled stocks. He had a huge holding in Vedanta Ltd., Titan, Lupin, etc.
The style that immensely pops out from Jhunjhunwala’s portfolio is being a value-based investor. It may appear that he had recorded a long position in a specific stock for time horizon hovering around 10 years. There seems a clear miss to en-cash a high growth stock, as value investors think that markets are irrational and it’s the intrinsic value of the company which is important.
Warren Buffet on the other hand, who had also made a great fortune was a pure value investing game.
But Rakesh Jhunjhunwala has taken both volatile trading and investment position simultaneously. He had recently reduced his holding in DHFL (Dewan Housing Finance Ltd.) and started investing in media entertainment and white goods businesses.
He has exposure to almost every sector decent enough to earn him diversification benefits.
|Dolly Khanna Portfolio Stocks (Jan 2019)||Rakesh Jhunjhunwala Portfolio Stocks (Jan 2019)|
|PPAP Automotive Ltd.||Agro Tech Foods|
|Som Distilleries & Breweries Ltd.||Anant Raj|
|Associated Alcohols & Breweries Ltd.||Aptech|
|Dwarikesh Sugar Industries Ltd.||Autoline Inds|
|Rain Industries Ltd.||Bilcare|
|Radico Khaitan Ltd.||CRISIL|
|Asian Granito India Ltd.||D B Realty|
|IFB Agro Industries Ltd.||Delta Corp|
|Thirumalai Chemicals Ltd.||Dewan Housing Fin|
|Gujarat Narmada Valley Fertilizers & Chemicals Ltd.||Edelweiss Finance|
|Nilkamal Ltd.||Federal Bank|
|Butterfly Gandhimathi Appliances Ltd.||Firstsource Solution|
|Manappuram Finance Ltd.||Geojit Finance Services|
|Sterling Tools Ltd.||ION Exchange|
|Tata Metaliks Ltd.||Jaiprakash Associates|
|Srikalahasthi Pipes Ltd.||Lupin|
|RSWM Ltd.||Man Infra|
|Nitin Spinners Ltd.||Mandhana Retail|
|Ruchira Papers Ltd.||Multi Comm Exc|
|LT Foods Ltd.||NCC|
|Prozone Intu Properties|
|Jubilant Life Sciences|
Whenever a person gets the news that one of the investors mentioned above has increased their position in one of the stock, most of the people think these large think tank might have access to some special information and hence have increased their stake.
These lead to a large demand by the followers and consequently the price of the share rises. When these investors reduce their stake in some of the stocks, selling of stock happens like an avalanche again reducing the share price.
Hence, on a net basis, these investors show a phenomenal number as they had first mover’s advantage.
If you want to follow, follow fast. Time is inversely proportional to gain.
People who follow them faster earns a suboptimal gain and then gain depreciates as one is late to this party.
This leader-follower attitude leads to ‘Anchor bias’. Where one acts hastily without owns judgment. There is a thought impregnated that if one doesn’t buy or sell, one might land up in huge monetary loss.
This psychological effect of fear of missing out opportunity is called ‘Herd Mentality’. This causes everyone to actually sell or buy stocks when every other people around them does so.
This is also one of the reasons they can’t trade intraday. Intraday trading is all about exploiting the arbitrage opportunity one sees in the market.
This arbitrage opportunity should last long to earn more profit.
When these high-end investors trade in some arbitrage opportunity, in a matter of seconds they get replicated and the arbitrage opportunity is seized in seconds.
As seen above both the well-known investors have different styles – RK has towards value whereas Dolly Khanna is towards growth.
We investors should understand the risk appetite and his/her own time horizon for investment. If one has limited time horizon with a comparative lesser risk appetite one can resort to value investment.
Growth style fits best with the mid and small cap, returns are larger but the risks involved are on the higher side.
Hence, for new investors blend style could be the best fit. Where one can invest the majority on value and a smaller proportion of growth stocks. Gradually moving fund concentration as per the performance of the stocks.
There is no harm if there is a style drift, which is shifting of style from value to growth or vice versa, in one’s portfolio. The investment philosophy, in short, could also be style-independent.
Also one needs to lessen their biases towards these investors, as they say, buy right and sit tight.