Courage and conviction key while investing, says Raamdeo Agrawal

Ramesh Damani says although he has been able to pick some of the best stocks which went on to become multi-baggers, he has never been able to bet big. Betting big is the hardest thing to do, he says.Below is the verbatim transcript of the discussion between Latha Venkatesh, Raamdeo Agrawal and Ramesh Damani.Latha: Let me start with your allocation chart, your power of allocation after the significance of the 21st Wealth Creation Study is that up till 20 studies MOSL was concentrating on what to buy, but now they are trying to arrive at a formula on how much to buy. You had those three portfolios with Bajaj Finance and Eicher Motors having an exaggerated presence in one and equal presence in the second and lesser present in the third and so you got one market beating 18 percent, one as much as the market 5 percent and another one minus 8.5 percent. Now my question to you is how much is the formula helping you allocate. Suppose you are bit exaggerated and Hero Moto turned out to be central bank what would you have done?Raamdeo: This goes on, in investing there is no guarantee that is why you don’t bet 100 percent. The very purpose that you go, you don’t bet 2 percent - - what I am saying is that you bet 5-7 percent, become better once you realised that you have an edge in understanding and the company is going to do well. I know for sure I am telling you that those situations I talked about all three of them - - I distinctly remember when I came to my room and started buying I knew we are sitting on to a winner and it is not that very day you have to know. Even after three months, six months once you start winning and things start opening out to be better say Rs 500 will become Rs 700 that is not end of the journey, you can double your bet.You started with 3 percent, you can buy another 3 percent, but very quickly you take it to 8-9 percent. Typically, what happens is like I will tell you Eicher, Eicher I came to know about at 6 percent, by the time we researched it was Rs 1,800 and first stock I bought at Rs 2,100 and I wanted to buy 50,000 shares on that very day I got 26,000 shares. After that the stock shot up to Rs 2,700-2,800 I never completed the buying. So, what you allocate in your mind that also you couldn’t complete on that very day because the price moved by Rs 100-200. This is an admission of what usually happens, but if that day if I had decided out of my Rs 100 crore I am going to buy at least Rs 5 crore worth of Eicher or 10 percent of that say Rs 10 crore of Eicher story would have been different. I am not talking about betting 30-50 percent that is not part of the focussed strategy that is part of the concentrated strategy.Latha: Typically it is courage of your conviction?Raamdeo: Yes, courage of conviction, so courage and conviction both are important. You have to build a conviction say you have done 2 hours work, work 2 hours more and work of the mathematics of it what it means, because this idea you are not going to get every day. You get once in one year, two year you get the idea, when you get the idea do a percentage betting rather than absolute number of shares.Lot of people they practiced very differently. They will buy I have got 1 lakh shares, but it is Rs 20 share. In your Rs 20-30 crore portfolio how does it make a difference - - you have to think in terms of percentage of the portfolio firs and then increase the percentage to the acceptable level. I am not talking about something where you could be completely killed like if you lose then you lose your shirt.I will tell you in Financial Technologies we bought 5 percent that became zero in six months, but that very year we bought Eicher 5 percent that became 4 times. So that diversification and your conviction that will take care of your portfolio.Latha: Is it really as easy to bet big to recognise the payoff and bet big or will you always be wiser only on hindsight. I mean McDowell's you could have bought 25 percent, but you chose to buy perhaps 2.5 percent?Ramesh: I wish I bought 2.5 percent, I even buy that much. It is actually the hardest thing as I look back in my career I have been blessed, I have been able to pick some great stocks and they gone on to be 10 baggers, 20 baggers even 100 baggers many of them out there, but I am not a billionaire like Raamdeo yet and the reason is that I am being able to bet the size that you should bet, because at that journey there is always self doubt. There is a lack of confidence there is a lack of conviction in your own ideas and for a investor to mature and become complete investor - - there is a maturation process, I don’t think from the get go you could be foolhardy and do it, but a mature investor requires to go through various bull market cycles before he knows in his heart what is right and what he can bet. It is an extremely difficult journey.Ramesh: Someone told me that concentration is not for cardiac patients, you have a lot of volatility associate with that, so would you say that concentration is just for really professional investors and amateur should not try their hand in it?Raamdeo: Clearly, concentration strategy we are talking about single digit portfolio size 7-9 at best, for that one the character of money had to be private money or money which is a permanent capital you can call it.Ramesh: Even for private investors, would you recommend that a regular guy goes in for a concentrated investment strategy?Raamdeo: I would recommend. If I was blessed with private capital and a situation where I was managing my own money, starting from here, I would do concentrated and I would do low single digit strategy after this study for sure. Because downside is limited and upside is massive. It can make a huge difference, but you need to bring that edge. You need to do a lot of work before you arrive at that situation that yes, this is a situation where you have a huge upside, very limited downside. I am telling you in Eicher, I went to my dealing room and I told the guys the upside is 10 times and downside in five years is doubler. That was the thesis. Upside was, I said Rs 6,000 was the market cap, it is likely to be Rs 60,000 to Rs 1 lakh crore company. And downside is minimum doubler because we thought downside is Royal Enfield and truck is upside. Ramesh: Let me pursue this point another way. Charlie Munger said, why do you want to bet on your 20th best idea? Bet on your best idea and bet very seldom and keep looking for mispriced bets. So we come back to the point that we started with. The lookout for the mispriced bet. Give me an example of how that happens. Other than the ones you talked about, what should an investor look for to find the mispriced bet? Is it within a circle of competence? Is it during special situations? Is it, as Warren Buffet found, when the American Express stock collapsed? Is it early in the bull market? When do you find these mispriced bets?Raamdeo: I can talk from my experience in India market. These are 3-4 ideas which I actually practiced and it was clearly mispriced and mispriced when I bought it, not looking back. I could see that at that point of time. And if not then, maybe a little later, say Infosys. It was a very clear opportunity in 1997, 1996 maybe even 1994. Till you bought it, till 1997, anybody bought Infosys, you made 100 times in the next three years. So, the opportunities come. And say like HDFC Bank. HDFC Bank, when it got listed in 1996, I had a clear understanding of the value migration that one of these private sector banks are going to make very big out of the banking opportunity and a decline in the PSU banks. In 1996 itself. When the stock got listed, 200 was the equity and Rs 40 was the price. In five minutes you could buy a million shares. That was the liquidity. And I did buy. But, there was some other story and I got out at Rs 52 and that price never came.So, my issue is that my conviction, you are sitting in a room and you had these books read and you understood the concept, but you are actually not working towards building the edge. We never visited the management at that point of time in 1996. I did not have access to Aditya Puri or there was no formal research set up and you could not go to meet the management.Also read: 21st Annual Wealth Creation Study ( 2011-2016) Latha: And there was no CNBC-TV18.Raamdeo: Yes, that was also not there. So, we did not create edge. And I could see big opportunity that it will double. Typically we start with doubler or tripler in 3-4 years. That is the basic expectation. Who knows it is going to go to 100 times. Even the management does not know it is going to go to 100 times. So, clearly, that opportunity was there. There was a massive tailwind. The place to start is the tailwind – massive tailwind and limited competition. Latha: Before I come to massive tailwind and limited competition, if you were to use the same HDFC analogy now, your theory was that it was very clear that the private sector banks will take over the terrain of the public sector banks. Today, will you say that NBFCs will take over a large part of the private sector terrain also and certainly a large part of the public sector terrain, therefore, that is the tailwind?Raamdeo: Yes, there are again certain niches because riches are in niches. Small niches, say housing finance companies. Prime Minister saab says that by 2022, he wants to have housing for all. Even if this country is able to build houses for all by 2042, you have a massive tailwind on the mortgages. Latha: So, having identified the tailwinds, how do you identify the winner in the pack? Is it the market leader HDFC or is it the one who is not yet recognised by the market?Raamdeo: Of course, if you want to make 18-20 percent, that leader is good enough. But it is large and on a large base to compound 25-30 percent is tough. It is humanly impossible for 10 years again 10 times. It may happen, but it is tough. But you can find newer emerging housing finance companies which are well-managed. We did this in Gruh Finance, just 4-5 years back. We bought it for Rs 200-300 crore and it went to Rs 10,000 crore. It is the most expensive mortgage company. It is selling still at 12-13 price to book. Latha: Tailwinds. In a sector that will definitely have tailwinds and limited competition, airlines. But, how do you identify? You put your bet on IndiGo, that is in the public domain. But how do you identify within this space available that SpiceJet will not do better than IndiGo? Is there a formula to get having identified the sector?Ramesh: You raise a very interesting point because Raamdeo and I have had this running argument about airlines and for the record, I will state that Southwest Airlines in America has outperformed Berkshire Hathaway over a 40 year period. That is a historical fact out there. So, Raamdeo and I, he has come full circle. He agrees with me now because he is smart.

Ramesh: I want to come back on the timing part because I find that in my life when I look back, the best opportunities came when the bear market was ending and the bull market was beginning, the stocks were so cheap by almost any valuation we take then that if you want a concentrated strategy you better go in at that time, because you wait as the bull market matures either your deteriorate in quality or pay a very high price for that and as a result the superior results don’t come, so it that an extraordinary focus during that twilight zone when the bear market was ending and the bull market is beginning, is that something that you focussed on?Raamdeo: That of course a god sent opportunity, you get a business opportunity and aided by a cheap price, because we saw that fastest wealth creating companies are less than Rs 1,000 crore, so the purchase price is extremely important to build a high compounding for long period.Ramesh: When you get them at the beginning of bull market?Raamdeo: At the beginning of the bull market even fairly large companies are available at throwaway price like in 2003 that was I think worst possible time in recent history of Indian market. At that time India itself was trading at 11-12 times, Reliance was available at 7 price to earnings (PE) multiple a lit bit of fight was going on and all, but it is available at 7 PE multiple, price to book (PB) was 1.2-1.3, at that point of time even very large company can be a multi bagger -- you can’t take away that power of buying extremely cheap at a market level, because relatively all the stocks will be available at those kind of valuations, but I don’t think that concentrated strategy has much to do with market timing it is about the stock timing. See after 2003 it is not that market opportunities didn’t come look at say Eicher just 4 years back or Bajaj Finance just 5 years back these opportunities come even in the best of the market.Ramesh: At the beginning of 2013 bull market.Raamdeo: You can say that, but it is not because of the bull market it would have happened otherwise - - like in two-wheeler industry there is nothing much has happened in last 5 years, but this stock has gone from almost Rs 2,000-3,000 crore to Rs 60,000 crore, so opportunity has to be seen and of course low price is very important to increase the odds will be much better if the market is also depressed, because one is the company’s earnings growth.Ultimately, it is about two things buying cheap and buying lot of earnings growth, so if you get very high quality earnings, high earnings growth at low price and low price aided by the low market situation it will definitely help you. At that point of time you will get many more opportunities, but I would think that has a limited role to play in fighting multi baggers.Latha: The reason why interrupted is Raamdeo goes strongly against what you are saying. Look at the first key takeaways thing stocks forget market, but what Ramesh is saying is think stocks but also think markets?Raamdeo: See when you are buying a stock, you have to pay a price because there is only thing is a price out there and I would like to have lowest possible price and whatever helps to get the price low, because stock price is low because market is depressed it is very good for me, but that cannot be the everything.Latha: Therefore the twilight zone is the time to think more or bet big that his proposition.Raamdeo: Clearly the low market do help in enhancing the returns, we are seeing study after study if you buy depressed you are going to make a lot more money, but the bigger extent will be the market will be very high for that limited period, so the superiority of the company is just an icing on top of that, but I am just saying that earnings growth and PE multiple - - there are two engines you are talking about the PE multiple, but earnings growth is the main driver of wealth creation.Latha: I want to dwell on the mistake, overstaying with the losers as you said is one of the cardinal errors, but it is a thin line between overstaying with a loser and courage of conviction. Probably you are staying with the loser because your conviction is telling you that it is going to turnaround. Can you always distinguish and be sure that this is a loser and you are overstaying. If it was that clear you would have anyway got out?Raamdeo: No, it doesn’t happen. Of course, I am emotionless in terms of selling the stock, but if somebody has bought at Rs 100 and the stock quickly goes to Rs 80 he is married to the stock, people are not that easy to book losses and that to very quickly. After few years if he gets some better opportunity and lot of pressure from some friend or something then only you will book losses.The retail investors they stick to the purchase price and that is why whenever the stock price comes back to the purchase price they sell their stock and that’s where the stock find lot of sellers at some point of level.Latha: But cannot a reasoning that I am overstaying with the loser actually turnout to be a wrong decision, because your original conviction in that stock was probably right?Ramesh: I think there is two parts to that suppose you are losing money that is your cost price losing money on that that simply said you need to get out he is completely right. What happens when in a bull market for example Titan went from Rs 40 to Rs 1,400 corrected all the way down to Rs 800, but you are sticking with the loser or did you have the courage to see it go back from Rs 800 to Rs 4,000 that the question.

Raamdeo: I think in losers I am not talking so much about the price losing, I am talking about the value part of it. See you bought something thinking that this company is going to grow say I bought Hero Honda by chance I thought it is earning 25 percent return on asset (RoA), growing at 25 percent available at 15-17 PE multiple that is my thesis. Now after every three years the company has major say labour problem and the factory doesn’t open for 6 months, 8 months whatever and the back of the management is broken and the competition has taken away the market share what happen with Maggi or something so if by chance those kind of things happen the business logic for which you had bought that itself is completely gone and still you are overstaying with the stock. It is not playing out as per your theory, price is one part of it you might have paid little more, but actually the earnings story is on so I would stay on.