In a freewheeling podcast interview with Moneycontrol Editor Santosh Nair, legendary investor Ramesh Damani talks about his beginnings, his investing journey and what individual investors should do if they want to succeed in the market.
“There are only two things. Buy great businesses. And target about 24-25 percent returns every year. That would double your money every three years," he said. "Almost any amount of money you start with will become a very serious amount of money at the end of 30 years."
Damani is also the chairman of the board of Avenue Supermarts, the parent company of retail chain DMart, founded by another market legend, Radhakishan Damani.
Q: Mr Damani, thanks for joining us on this podcast. It is a pleasure to have you here.
A: Hi Santosh, thank you so much for coming to my office. It is a great pleasure to be on your first podcast.
Q: Thanks. So tell us how did you end up in the stock market? Was it a planned career move to be here?
A: It wasn't actually... I was, like many of my generation, when I graduated sometime in the 70s -- I'm that old of course -- a lot of us used to go to the West for better education and better opportunities. India was still, if you remember, a fairly closed economy. So like a lot of my brethren at that time I went abroad, I studied and got my Bachelors and Masters abroad, and then I started working in technology industry. In many ways, I was the vanguard of the Indian move into the US technology. But sometime in the late 80s, I was also the only son of my small family, so there was enormous pressure to come back to India. And there was also a feeling that my father articulated quite well. He said that India is on the cusp of great change. In retrospect of course, it was a very precise call. So he urged me to come back and the Bombay Stock Exchange was offering memberships for about Rs 6 lakh. He said it was a great thing for me to go and buy.
Thanks to his efforts and the efforts of Mr [MR] Mayya, who was the executive director of the Bombay Stock Exchange at that time, I managed to get a seat as a broker for Rs 6 lakh. By happy coincidence, the value of that seat in 1989 was Rs 6 lakh and in 1992, it became Rs 4 crore. So it was a good investment all the way around.
Q: So, what were the early days like?
A: You know the early days of course were very skeptical. I mean including people close to me in America were very skeptical, about India opening up. There was lot of skepticism from my wife's end because she was very happy in a Californian lifestyle. We had settled in, we had a young kid at that time. I don't know sometimes it's a father's instinct, sometimes it's your own instinct.
I always believed that the world would globalise, you know after the Berlin Wall had fallen, that increasingly the economies would have to open up. I mean that was a young man's thoughts at that time. I just sensed an opportunity out here. So I came here and Dalal Street was a backwater. I think it didn't open up until say 1995. So while for the first five-six years, the brokerage business itself was very good and lucrative, Dalal Street was still considered a backwater of international finance. Today, of course, it is one of the leading emerging markets, part of the MSCI index.
But in retrospect those were good years to learn the business, to meet the players. I was very fortunate in those years to meet people who have become giants of this business 25 years later. People like RK Damani who as you mentioned founded DMart, Rakesh Jhunjhunwala, Durgesh Shah, Nemish Shah. I was very fortunate to meet this absolutely bright bunch of individual investors who have influenced and shaped my career.
Q: So, early on was it just broking alone or did you invest also?
A: I started as a brokerage because the capital was scarce, so we needed the money to finance the brokerage part of the business. But very soon I became envious of my friends, because while I was making 1 percent of my brokerage, they were making 100 percent returns on the stocks they picked. So at some point, I realised that I wanted to, as Raamdeo [Agrawal] might say, "value migrate". I wanted to move from brokerage to proprietary investing. I think maybe we did that more seriously after say 1993-94 after the fall of 1992, when we want to look back.
Brokerage was good but it wasn't great business, you could make a living but you could never get rich off it, unless you truly build scale. So maybe I started investing in 1994. For the first four-five years, I was pretty much being a broker.
Q: You mentioned the stock market crash of 1992. How did it affect you, your business?
A: Luckily, we were not investing at that time. But I used that time to come up with a philosophy of how I want to invest by studying, you know, the Warren Buffetts of the market or studying the greats in India. I think they helped me come up with the philosophy on the market.
I read very carefully that, for example, you don't want to buy stocks that have gone down a lot in this bear market because they would tend to fall even more. You want to find new ideas, new leaderships. So that was one of the lessons I learned very early on in my life. I think those lessons really helped [keep] me in good stead.
Q: Do you recall your first major trade?
A: I do. Actually the first one -- there were a cluster of trades I did at that time -- but the one I think that bought a lot of notice to me and boosted my self-confidence a lot was there was a public sector company called CMC, which was divested by Government of India at that time. Nobody knew what to do about it and the person who owned it, GIC, was selling it at maybe around Rs 10-15 which in effect, the market cap of the company was maybe 30-40 crores. Which was nutty because the company -- remember this was my background as a software engineer in California before I became a broker here.
They had done the BSE BOLT trading online software. They had also done, for example, the Indian Railway system. Now I knew from my background that these are very prestigious projects, and very expensive to implement. If IBM had done these projects, say for example the Indian Railways project, they would probably charge the Indian government USD 100 million. And here, this whole company was available for like USD 5 million dollars or something like that. So I realized that I was onto a bargain.
So I remember I wanted to buy -- this is one of the lessons that recur in my life -- I wanted to buy maybe 5000-10000 shares of CMC because it looked like a good bet to me. And my father actually held my hand and he says do you think this is worth a bigger trade. And I said yeah and he says no, do a bigger trade for it. So as only fathers can do, he literally held my hand and made me buy a larger block of that share. And as my good fortune would have it, the stock caught fire in the market. 13 months after listing, it went from Rs 20 to Rs 800. So at a 40x in one year, after that, it went up and down and finally got merged with TCS so it got merging beyond that. So we did good amount of money in there.
[There were] probably two important lessons in life. The first was to have your own conviction. To understand the business that you are buying yourself.
A lot of people really didn't want to look at it that time because technology companies were not understood. PSUs were not understood. I managed to go through those objections. And secondly the importance of betting big when you have a good idea.
You want to back up the truck and buy. Because in a bull market, you want to be loaded on good stocks. Great ideas are very rare. When you come up with a great idea -- I mean think about it CMC was at 20 bucks, you are getting this company for 30-40 crores. This company has a potential as was later found out -- to be a hugely scalable company. So I think I learned those two lessons very early in my life. The thing about CMC, which I always tell of my friends, my family was that before CMC, nobody knew me in the market. After CMC, nobody would ignore me in the market. Anytime you pick a 30-40 bagger, you are considered pretty high up there in the market.
Q: So they say successful investing is as much about discipline as much about identifying right kind of stock. So was there any set rules that you have been following then and still continue to do so today?
A: I think among the rules I realised that this is a business of patience. Very early on, I realised that if you really want to make money, you have to be invested in a business for period of time. A lot of people bet on price. For example, they buy company X at Rs 150, it goes to Rs 200, they say I am making 30 percent of my money, I'm pretty happy. Out there, Warren Buffett makes 20 percent, I made 30 percent, I'll sell all of the stock. But experience has taught us that great businesses build great value over a long period of time. They keep compounding.
It will go to 300, then 500, then 700 and then 1000. And particularly at the early stages of the bull market, the winners that we have can sometimes be up 10X , 20X, 50X by the time the bull market gets over. So it is very important to hold on to that business almost for dear life.
So I learned that very early on not only by reading but also by watching and also by implementing those strategies. Because we kept holding our CMCs we didn't try to make double our money or triple our money. That would be great returns, I mean you have tripled your money. But it gave us an opportunity to make almost hundred times our money over time. So I realised that great ideas are very rare and if you get a good idea you need to hold on to those great ideas. See them flower into great businesses over a period of time.
So it is a lesson which is very important to learn in the market. People always say that ‘Oh, I am doing everything right. I am [still] not making money in the market’. It is because you don't understand the principle of compounding. Great businesses compound over time, compound your wealth over time.
The trick to get wealthy if I may say from what I feel, you need to double your money every three years. That should be the kind of benchmark that we used to use. Because if you assume you have a 30-year career in the financial market -- most of us will start at 25 and retire by 55 or 60, so say you have a 30-year career in the market. If you double your money every three years, that in effect it means that you are doubling your money ten times.
Then in effect, it means that your wealth has grown 1000 times. What do I mean by that? Suppose you start with Rs 10 lakh and double your money every 3 years, over a 30-year period, Rs 10 lakh becomes Rs 100 crore. So that's a phenomenal amount of money to have. And you must remember for a large part of my investing career, long-term capital gains were taxfree in India. So we didn't have to pay any capital gains tax. So we could compound our money very efficiently over that period of time. So I mean those are some of the things I would suggest investors do.
Q: You mentioned that you have to hold on to stocks for long period of time but any average duration that you keep in mind when you are taking a bet?
A: It's not the duration. I think people generally mistake that -- if I keep something for five years, I will make money. I mean you could have bought stocks that have gone from Rs 100 to Rs 5 over five years. So that is obviously not the duration. The duration is to buy great businesses and to stick with it. Great businesses can last a market cycle or various market cycles. But you have to figure that out: is this business is like a liquor or tobacco business? Will it outlive any market cycles because human habits don't change?
It will always swing between wanting to go out and celebrate with friends, wanting to have a good time or wanting to go to a favourite vice like smoking a cigarette. Those business will outlast [others].
There are other businesses that work for a period of time. There will be real estate boom, there will be a construction boom. So you need to time those a bit more. But any business that requires you get out in three months or six months is a trade, it’s not a business, right?
I think investors need to understand that. Rome wasn't built in a day and neither are great businesses. They compound over a period of time to build great franchises
Q: Have you done any short-term trades before you started holding it for a very long period of time?
A: I have. I do it all the time. I am sitting in front of the screen. I am a broker. The temptation to do it is very strong. But I don't do it with more than 5 percent of my net worth or 10 percent of my net worth. You do it to be engaged in the market, to have some fun. Everyone likes the lucre of easy money but to be honest, the serious money is all in good businesses and good businesses generally take time to mature. It might be years of under-performance of that business. But if you have a strategy, a thought process, you should stick with that.
Q: Do you ever go by your instinct even if all the conventional indicators say that probably this business might not do well?
A: I mean I do because that is the art of good value investing, to be a contrarian. A lot of the picks, when we bought them, were not met with popularity in the market. So that's part of the game. If you are scared to be a contrarian, you will probably not going to be a good value investor.
Q: What's your philosophy about money?
A: I think it's a very evolved philosophy over time. I think I have learnt this from the greats whether it's Warren Buffett, R K Damani. That I think we've all been blessed. We've all had more money than we could profitably use in a lifetime. But the way we think about it is money [helps] keeps a score in the market. Beyond that our habits don't change, even if we make more money. We still live in the same neighborhood, dress the same way, eat the same way, travel in a particular way, maybe instead of economy, we travel business class now.
But It doesn't change us. We have to view ourselves now as trustee of this wealth. We are doing this and after we finish compounding the wealth, we will give it back to society. I think money is a great way… financial freedom is great. The thing I value most in my life is the financial freedom that the markets have bought me. But at the end of the day, I truly believe that everyone who has made money the hard way, by compounding the money and by remaining invested for a period of 30 years is ultimately a trustee of that wealth. It is for the greater good.
Q: You mentioned that you were lucky early to be with some of the big names of the market when you had just started off. So what were the key learnings there?
A: There are so many. I was very fortunate to be able to be with the Indian legends. I was able to look at them and meet them almost on a daily basis. One was just by observing what they did. Second was by reading about the great investors: the Soroses, the Buffetts, the Templetons of the world. So I was very lucky. In one way, I had an inside view of what was going on and then I also had depth by reading about what global investors were doing.
To give you an example of one overseas guy who I found very helpful was Carlos Slim. He's maybe the third or fourth richest guy in the world today. He made his fortune in Mexico and he had a very simple philosophy. He said that I am always bullish on Mexico. He was actually an immigrant in Mexico. When the Mexican market was selling off in the ‘60s and ‘70s, there was a currency depreciation and there was an economic crisis, he always kept buying equities in Mexico.
As a result, he built up some stakes in very serious companies. I remember reading his biography and being enthralled by it. When India went into a similar crisis in the 90s, we defaulted on our debts almost, went through various crises...and I realized and learned from the masters in India, that you remain bullish in India. That countries don't go bankrupt. That businesses will find a way out. The worse it gets, the more there are chances that economy reform will have to happen in a democracy.
So by luckily having a ringside view, and also being able to impart [oneself knowledge] by reading I could develop my own set of principles, which have held me in good stead.
Q: So what was your experience during the technology rally in the late 90s and early 2000, on the way up and down?
A: You know what Steve Job says. You need to connect the dots in life. You don't know what decision helps you where. For me, that is a proper example. I used to work in the technology industry in California -- my first innings of my life for example, I would say, in the early 80s. Then I came back to India. At that time, India had no technology base at all. But then companies like CMC, Infosys, Wipro went public and you could participate in their shares.
I was one of the few people who understood the value of those business franchises. They didn’t have land, machines, people walked in at 5 am. But I realised the intellectual property that these companies were capable of creating. So I managed to latch on to that.
So my life connected. Though I worked in a different area, because of my learning in the technology industry, the value of the intellectual property, algorithms -- soft power as you call it -- I realized the value of the franchise will explode in India. You participate in the boom to a large extent with the technology shares leading up to 2000.
Then, of course, you also realise that trees don't grow to the sky. You need to value things in some perspective even they are the tech industry or whatever. The market really got swayed at the other end of the technology businesses. So at some point, we figured out these were ripe for a crash. So you can meld the two together: an intuitive understanding of the industry and an intuitive understanding of the market. I think that was the maturity after 2000. We came out of that. We lost some money but we came out basically richer than when we entered it. So these were the great learnings.
I think that taught me about future bull markets. That you need to know when to get out of assets, when the bull market gets over. All those issues are sometimes are very painful lessons for investors.
Q: So how did you use those learnings during the crash of 2008?
A: The way to understand this... I witnessed maybe five bull markets in my life. Starting with the ’88, in which I didn’t participate at all, '92, 2000, 2003, 2008. So many bull markets have taken place in the 30 years I have been in the market. The way you validate yourself, there are two ways first: First, every bull market must make you richer and more powerful.
Am I better off than in '92. better off in 2000, better off in 2003? That is the first lesson you learn.
Second, every proprietary investor asks himself a very simple question: Am I in the process of doubling my money every three years? Sometimes it takes two years, sometimes it takes five years, that happens, but on a smoothened average basis, you should be able to double your money every three years. Particularly if you are starting from a low base. And if you are doing that, you are on right track. If you are not doing that, better change your track. Because the way to financial freedom I told you, is to double your money 10 times in your financial career.
Almost any amount of money you start with will become a very serious amount of money at the end of 30 years. You need to follow that.
Once I understood those principles of compounding, and Mr Chandrakant Sampat did a lot to explain to me — he is one of the legendary investors in India. I was in MBA, he taught me about compounding.
Taking those building blocks, I tried to measure myself. I don’t really care if a particular stock does well or badly but on an aggregate, my portfolio should be doubling every three years, which is about 24-25 percent compounded returns. And if it does that, I am pretty happy. So once I understood that, I didn’t panic if someone told me that his stock tripled in three months. I don’t really care.I want my portfolio double every 3 years.
If I do that, I know what my journey leads me to. I know where it goes. I think each bull market hopefully we have learned something, and in the next bull market implement these lessons and become stronger. But the underlying lessons in all of this is, all this is buying great businesses and you double your money every three years. If you do these two things right, I think you are well ahead of the game.
Q: So what is your definition of a great business?
A: A great business is one that has some pricing power. That would be the most important thing. It needs to have some pricing power. They can't raise prices or if they have to pray to God before they have to raise prices, it is not a great business. It has a moat so that not many people can get into that business very easily. And it must have a good management which sees the great external opportunity available.
Tech was a great external opportunity. The world wanted tech and India offered tech. And occasionally you have to marry with that market cap. The market cap should be so cheap for that stock, that you see something beyond that. You kind of marry all these things together, you will find what I call a great business.
Q: And what are some of the common misconceptions that people have about the market?
A: Oh, there are many but the most common one is that it is a get-rich-quick scheme. I think that is perhaps a misnomer because you need to know that it would compound your money. So if you are putting your money in fixed deposits, you are getting 8 percent returns and you are paying 30 percent tax on that, you won’t be able to grow rich. But if you buy investments-- till I think a year back, there were tax-free long-term capital gains and tax-free dividends. Now the government is taxing us: 10 percent long-term capital gains.
So people were asking maybe the opportunity is closed. I said no, and the reason I say no is because tax is only done once you sell the share. You find a business and keep it for eight to 10 years, there is no tax. That grows for you tax-free.
So try and find businesses that can last six years, eight years. There is no tax consequences for you on a year-to-year basis. So the opportunity is still there. I mean this country is a young country. Equities as an asset class are not valued in India. Gold is valued, real estate [is valued]...but India is increasingly getting warmer to equities.
If you are young in India, you need to be thinking not of the next two years, the next vacation or the next holiday but financial freedom. If you are doing that, equities are a good place to start.
Q: When you started, information was very scarce. Today, there seems to be too much of it does that help or harm an investor in his decision-making process?
A: Yeah, it was scarce. Sometimes you could leverage that information or insight to [make] money. Now, as you can see, I can still leverage it. I think it comes out from some insights in life. You need to have been well-read, well-educated, well-thought. You need to spend some time thinking, reading a balance sheet. A lot of the time really should spend in thinking.
Which people don't do. They lead a busy life. From eight to five, constant appointments. No free time, no time to read. That's not a good thing to be an investor. Might be a good thing to do if you are a salesperson or an engineer but for investor, you need free time to think. How will the world look 10 years from now. Who will prosper? Who will be in a depression? Which are the businesses which will do well?
So my feeling is that if you spend the time thinking and reading, you will probably be way ahead. Warren Buffett has said this: this is not a high IQ business. Suppose your IQ is 120 and someone has an IQ of 90, give the 30 points to someone else. You don't need such a high IQ for this business. But what you do as he said, this business is simple, it is not easy. And the hard work you need to put in is reading and thinking. If that's not your strength, then maybe value investing is not for you.
Q: Now when you are on the board of DMart. That would have given you a chance to see how a company is run, decisions are taken. That must be very different from the way you used to view companies purely as an investment opportunity. So what are some of the learnings there?
A: Yeah, the management of DMart spoils me. Of course, I am on the board and I have oversight of the board. But we have such a great management team that delivers year after year. I know from experience most companies don't do that. So I am sometimes also in awe of my own management team. Of how brilliantly they have built up the business and how they deliver quarter after quarter. So, when you see greatness you recognize it
Q: Thank you so much for those insights. It was a pleasure talking to you Mr Damani.
A: Always a pleasure Santosh. Thank you so much.