Wary of the investment risk equity markets pose, the common man chooses mutual funds as a relatively safe investment bet.
But whether this approach can make one as rich as market veteran Rakesh Jhunjhunwala or not is a tough question to answer.
Speaking at a panel discussion during the Mission Prosperity launch event, Ridham Desai, Head of India Equity Research and India Equity Strategist at Morgan Stanley, said that if you are willing to give up your monthly salary, then in his opinion mutual funds can make you as wealthy as Rakesh Jhunjhunwala.
Raamdeo Agarwal, Joint MD at Motilal Oswal Financial Services suggested to invest all of one's savings in to equity in order to become as wealthy as he is.
When jovially asked by CNBC-TV18's Latha Venkatesh whether he owns a house or not, he replied, "Yes, I have a house, but that is it. After that everything is in equity."
In the panel discussion, Madhu Kela, Chief Investment Strategist at Reliance Capital N Jayakumar, President, Prime Securities also listed their views on investment strategies which would help in wealth creation.
Below is the transcript of Madhu Kela, Ridham Desai, N Jayakumar and Raamdeo Agarwal's interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.
Latha: Today we understand from the papers of course, that Mr Rakesh Jhunjhunwala's total net worth is Rs 10,000 crore. At CNBC-TV18, we cannot invest in shares, so we depend on mutual funds. Since you are a neutral party, Ridham, can we these guys make me as rich as Mr Rakesh Jhunjhunwala?
Desai: You can try. There is a very famous quote by Warren Buffett. He said, "I became rich because I was lucky and my luck began the day I was not born in Bangladesh, but United States of America." But, we are plagued by three things, as Nassim Taleb would say, three intoxicants or three habits which really hurt us. The first two are very obvious, so that is drugs which can be intoxicating and you can get hurt and most of us should not be there. The second is carbohydrates. We are all plagued by carbohydrates, that is why you suffer from all these illnesses.
But the third one is what really hurts you and that is why you cannot become Rakesh Jhunjhunwala which is your monthly salary. If you are willing to give it up, then I think they can make you Rakesh.
Anuj: Not Rakesh but Raamdeo, let me ask you think one. How can I be as rich as you, you are also quite rich? What should I do in terms of investments?
Agarwal: Have 100 percent of your savings in equity. That is the first thing.
Latha: You do not own your house?
Agarwal: Yes, I have a house, but that is it. After that everything is in equity. You see, actually Buffett should be called 'King of Compounding'. That title, in anyway, it has not come, but he is one guy, for 50 years, he has compounded at the rate of 20 percent and just now you are reeling out information that there are so many funds which has done better than 25-30 percent.
So, for you to find one of the managers who is going to do 25 percent, at 25 percent if you start with Rs 1 crore, in 10 years, you will go Rs 10 crore, 20 years Rs 100 crore and 30 years Rs 1,000 crore and 40 years, Rs 10,000 crore.
Latha: Narrate to us a story that really inspired you about yourself. A great idea you got, stayed with it and made money?
Kela: It has been a fantastic journey with the Reliance group. When I joined the total equity corpus was Rs 12 crore. We always were convinced that it is going to be big but none of us thought that in matter of 15 years from Rs 12 crore or Rs 100 crore, we will be managing upwards of Rs 3 lakh crore. So, it has been a fantastic journey and its been extremely satisfying.
One thing which has remained common between all people who work in Reliance Mutual Fund, whether you go and ask a peon or a fund manager or a marketing person is the DNA, that we can do it, we are extremely passionate about doing it.
That DNA has continued to remain that regardless of the adversities, regardless of who says what – If you see in 2004, 2006, 2008, there are so many events when the market fell by 1000-2000 points and we were looking for opportunities that whenever the market falls, we have to go, hold a event in Bombay Stock Exchange and I used to lead it, we used to stand up and say that this is the opportunity, you please invest more. So, it has been consistent passion and our conviction in India and equities that is what has led to this success.
Anuj: I heard you say that you should avoid temptation to trade. What are the biggest investment mistakes that people make and that you should avoid if you want to make wealth like Rakesh Jhunjhunwala or some of the other well-known individuals?
Jayakumar: I think the two biggest things are staying with your conviction and accepting that you are wrong which means actually eliminating your mistakes quickly, taking your losses quickly and the ability to ride with your conviction, not just one year, two years – if you see the returns these people have made, the power of compounding comes in by definition when you are invested for multiple years.
To underscore that point Warren Buffett who is USD 65 billion odd today was actually USD 1 billion when he was 53 or 54 years old. So, the power of compounding from 53 years to 85 years and in a private conversation he has actually said that the mistakes that you make as a youth got eliminated when he was 50 plus.
Latha: What are those mistakes?
Jayakumar: The temptation to stay with – the most difficult thing is to take your loss and get out and say I made a mistake in an investment. The most difficult thing is to say that I am staying the course year on year, look at the winners, look at Rakesh Jhunjhunwala you talk about Titan. It is not that Titan has been a one way run, there have been ups and downs and every time it moved from a particular range it kind of moved up another 50-80 percent.
So, the compounding just keeps getting better. So, the courage of conviction to stay with your winners and actually take your hits and say I made a mistake, I think these are the two of the most important attributes which can make or break that compounding if you will.
Anuj: That is an interesting point, because I get a lot of messages from retail, a lot of tweets as well and the general theme is that people stay invested with their loss-making investments and they book profits when a stock goes up 10 percent. In your experience, what should be the holding period? I remember having a conversation with you, you said 10-baggers do not interest you anymore, you are now looking at 50 and 100-baggers.
Desai: I was always looking at those. But that I have made too many of them. But just on that point that Jayakumar mentioned, I would like to summarise it one line. It is about time, not timing. A lot of investors get too caught up with timing – this bottom is coming, we should catch it. But that is very hard to do. Just spend time in the market and everything gets taken care of.
In fact, it also forgives you for some of the mistakes you make. My own experience is actually the mistakes fall by the wayside because the winners are so massive in size that the mistakes look very small in hindsight.
So, if you are not in a position to detect that, it is still not a problem. But you have to spend time and time is not about one year, two years. It is multiple period of five, seven, ten, fifteen, and twenty. I like to believe it is like your whole life career, so you start investing when you get a job, say at 25 and then you invest all the way till you are sixty and then enjoy the fruits. So say 35 years.
Latha: I still think Anuj's question is valid because whether it was a mistake that you should have eliminated or whether you should have patiently stayed through the trough, you know only after the event. You do not know it at that time and that is why I guess we need expert fund managers to take us through it. So, let me get to what launched you into the field of fund investment? Tell us about one story that you chanced because of your research and one story that you chanced because of luck.
Anuj: And you cannot say Eicher Motors and Hero Motocorp.
Agarwal: Where we made it because of research was Bharti Airtel. Can I go with that?
Anuj: Yes, of course.
Agarwal: So, that I could see because right now telecom is very hot and it is very relevant. In 2003, India did not have telephones. We had about 45-50 million fixed lines and a country of a billion people and we had 50 million phones.
It was almost impossible to get the phones and even for the government to provide despite all the intentions. And here comes wireless and you could execute – every quarter they were growing by 100 percent.
The demand was so massive and yet the Bharti stock was available for Rs 5,000 crore at Rs 25 and that was the only company listed and incidentally that was the best and the largest.
We could figure out in February, 2003 when Mr Mittal announced that they have broken even, we could figure out that in next five years this company is going to make at least Rs 25,000 crore and the stock was available for Rs 5,000 crore. In the next two years, the stock went up by 50 times from Rs 25 to Rs 1,200. It happens in these kind of companies.
And this is the era of internet. Everything is exponential and you will get a lot of stories and more so going forward which will start from Rs 100 crore and Rs 200 crore, you will have not heard the name and suddenly become global and it will become a few billion dollar.
What has taken for HDFC or Bharti or many companies to go triple USD 10-15 billion or USD 20 billion, 20 years. It will take maybe 20 months, 20 quarters for them to just go like rockets because now the market place or opportunity place is global, no more local.
Latha: The problem for the investor or the lay investor is how do you choose from the myriad funds? In the first place, let us categorise. How does he position himself between debt and equity funds, balanced funds, within a fixed income, a whole range of funds, near-term and longer term?
Kela: First of all, there are now, a lot of very seasoned distributors who are available, wealth managers who are available, my friend sitting here, N Jayakumar, who have built such an incredible platform for retail investors and so many other distributors friends who are sitting here. I am saying if you are someone who is doing it on part time basis, just one a casual basis, this is a 400 fund, I should put my money there, I have some half cooked knowledge, that is not the way. There are people who are available.
Secondly, if you want to do it yourself, there is Crisil, there is value research, there are lots of people who are available for you to help. Thumb rule which I have practiced, which I have told people to practice, A] your mutual fund portfolio should not look like you have 50 funds. Otherwise you are better off choosing 50 stocks. So, you should have a maximum of 10-12 funds in your portfolio.
Secondly, this one place where experience plays a big role so you have to go with people who have a track record of investing. Because yes, there are a lot of seasonal industries, there are a lot of seasonal funds which do well, but they go off once the season is over. So, you have to bet on people who have a very consistent and a good track record of performing. So, you have to keep these two or three things in mind. Then it is easy to construct a portfolio.
But the difficult part is that when the market goes through a trough, when the market goes through challenges, at that time, you do not listen to your neighbour, do not listen to what has come, in that sense, print or media and do not panic basically. The trick is to just continue to hold on to your investment having faith in the fund manager as well as in the markets and that is when you make real returns.
Anuj: You say investors should ask how much should you buy and for what timeframe you should buy. From your personal experience, one stock that you thought you should have bought more and should have invested longer?
Kela: There are so many of them. When we bought Siemens, we were very early, we bought Jindal Steel and Power, in 2002-2003 these companies were not even heard of. We bought Jindal Steel and Power when the market cap was Rs 300 crore and at the peak the market cap went to Rs 70000 crore.
We bought Divi’s Lab when the market cap was Rs 140 crore at the beginning of IPO and at the peak it went to Rs 40000 crore. If you ask me the only regret which I have looking back is I wish I did not discover many new stocks, I just kept on buying what we discovered in that time. I think we would have made a Guinness Book of World Record if we had stayed with our investments which we had identified very early on.
The thing was that we could not buy enough or maybe we needed this experience which has come over a period of time, something going little bit wrong in the company or in the market or from time to time markets really underperforming and challenging our conviction, I am sure we have learnt and the next 20 years we will have a much better performance in this regard than we had in the past.
Latha: What is the learning point in your career that made you an investor?
Desai: Raamdeo mentioned at the start that you should have 100 percent in equities. There are people who have 140 percent in equities because they have debt. I think leverage is the death knell of investors because it takes away your flexibility. So, I was very fortunate to learn this in 1991.
In those we had Badla system and I used to trade stocks and this was well before I started my professional career. I was short Tata Steel going into an afternoon session. Tata Steel was going to report post market and I think the market started talking about a batter than expected earnings and there was no CNBC-TV18 those days, we only had the PTI screen and the ticker used to come with a lag of 15 minutes. So, you were only reliant on the broker for the latest quote.
I didn’t get the bad news at all, I just saw the share price run away from me and by the time the market was closing I had lost my entire fathers life savings because I was on a levered trade.
At 2:05 pm I called him up very sheepishly and I said I have lost everything, what do I do? He said what do you think you should do? I should we should double up because by then Tata Steel had reported and I said it is a blowout earnings, this stock is gapping higher.
So, he said so whatever you want. I had lost everything, I doubled up, next morning the stock went up and I covered and that was it. I stopped doing leveraged trades and after that I became an investor. I think that was a very good learning experience.
Anuj: Any personal experience that you can recall?
Jayakumar: Stock market was new to us. We who came from Delhi actually thought that this was den of wise. I saw it first time when I was working in Citibank. I learnt by investing my monthly salary, whatever little that we had into couple of stocks, Glaxo and few others. The fact that you could make much more than you could make at work, in a sense tempts you to say, can you do this on your own and so on and so forth and hence the move to Prime etc. However the real takeaway from this is that you have to make money where the crowds aren’t there.
Sometimes you can call it the arrogance of youth, you can call it the arrogance of intelligence you think you have, that you want to go out and – my fetish if you will is for small and unknown, unheard of stocks and that which you have to do a little more work on. I think that is what set me on the path to trying to discover some of these.
Desai: One thing which I did not mention is that this was May of 1991, so you guys will have no idea of what happened after that. The Sensex went up 5 fold in the subsequent 9 months. So, just look at my luck. It went from 900 to 4500 in 9 months.
Latha: What will Trump do to the markets? Is he going to create a trade war and therefore spoil the good game that is going around in equities all over the world or are the next 2-5 years going to be good years for growth and for equities?
Desai: I think sequencing is important with respect to the US Presidents policies and there is not enough clarity right now for me to actually make that call. At one end he is likely to offer tax cuts to corporate America, at the other end he is going to probably levy a border adjustment tax though I felt in his last speech he has diluted the impact of that or his intentions. So, depending on the sequence it would determine how the market behaves in six months timeframe.
I don’t think the market will care that much because right now we are in a global reflation trend. Global growth is heading higher, global inflation expectations are heading higher, rates are heading higher, this is a good environment for equities. So, you can see that rub off into India.
80 percent of what is happening in India since December is global, it is not local. You can see the correlations are high and global economy is actually surprising on the upside.