The Govind Parikh Interview: Creating bear market buying power and other secrets of successful investing

Then, I had a chance visit to KR Choksey’s home – a veteran investor of those times. He ran me through some of numbers of Bajaj Auto from its annual report and explained why the company will do well. That was a turning point, I got seriously interested in investing. Choksey become my mentor and guide. He took me with him on many company AGMs and plant visits.

Take us through some of your early bets...

Ramco Cements (then Madras Cements) and Lakshmi Machine Works were my early bets and they worked out quite well. There was a lot of 20 shares of Ramco which was on offer when the company’s market cap was Rs 1.6 crore and the Rs 100 paid up share was available for Rs 60.

The investment in LMW was accidental. I bought shares of its arm Lakshmi Electric Control and when I went to visit the plant to find out more about the company, one of the senior executives there asked him to have a look at the LMW plant. The Rs 100-paid up stock was available for Rs 180 at a market cap of around Rs 8 crore. Impressed by the size of the plant and the long waiting list of customers, I decided to invest in the stock, which would eventually go on to hit Rs 15,000 (adjusted for bonus) over the next few years. But I sold way before the stock peaked, because I was making a profit which seemed too good to be true!

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You are known to visit factories and managements before investing. Tell us about some big winners you were able to spot because of this approach

I once had a chance to impress my mentor KR Choksey! I arranged a meeting for him with the usually reclusive MRF management in the 80s. The stock was quoting around Rs 40, and the company was expanding its capacity. After we stepped out from the meeting, Choksey clasped my hands and shook it hard. “Very good, very good,“ he said.

I did not understand the cause of his excitement, but he had worked out that MRF’s profits were set to more than double once the new plant was commissioned in 18 months, because turnover would double and the margins were much better. And since there was no equity dilution, the EPS (earnings per share) would reflect the profits soon. I myself bought 500 shares at Rs 40, but as usual cashed out quickly.

Were managements always welcoming with information about how their companies were faring?

Well, there were occasions when plant visits disappointed, though at times in an amusing way. Once I travelled to interior Andhra Pradesh to meet up with the management of a tyre retreading company. I endured a bumpy ride in an Ambassador car on the last leg of the journey to reach the plant. I had gone prepared with a long list of questions written on a paper and was expecting to be taken on a tour of the plant by the managing director. That did not happen.

When I started asking the questions from the paper, the MD took it from me, read the questions and handed it back. “All this is not required. The company is doing well. Let’s have lunch,” he said. I was presumptuous in thinking that the company would take a small shareholder like me seriously!

Jokes apart, management quality is a critical tick box in the list of attributes I look for in a company. You will get value if you look hard enough, and the companies may make profits as well, but capital allocation is where most managements trip up, sometimes the promoter will buy an aircraft or some such using shareholder funds. For us, it matters how well the promoters treat minority shareholders. Because that is often an indicator how the capital allocation decisions are likely to be.

Most people understand how to buy, but when to sell is always a challenge…

We buy shares to hold, but also keep reviewing our positions. There would just be a handful of shares that we have not sold at all, 3M is one of them. We definitely sell to book profits, but not all of it at the same time. As long as we see growth, we keep some shares.

Two changes I made to my approach after the market crash of 2008 was one, always keep a part of your portfolio in cash and two, don’t wait till the prices fall all the way. We are OK as long as a stock falls up to 20 percent, not more. Our first aim is to protect capital. While identifying a stock, we think in terms of how much money we could possibly lose and then decide if the upside is worth the risk.

For example, we picked up Tata Motors around Rs 80 when the stock was in a free fall during the COVID meltdown in March 2020. I was not sure how much money I would make when things improved, but I was certain that I had little to lose at that price.

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You invest in holding companies, something most investors are averse to…

We look for holding companies, where either there is a sharp discount to the NAV (net asset value of the companies held by it) or where the underlying companies have strong growth potential. In the first case, just the narrowing of the discount, even if the underlying companies’ value remains the same, is good enough to earn a handsome profit.

We doubled our investments in Maharashtra Scooters when the discount to the value of its holdings in Bajaj Auto and Bajaj Finserv reduced from 84 percent to 68 percent.

Besides, there are times when the strong performance of the underlying, like in the case of Bajaj Holdings, which held shares of Bajaj Finserv and Bajaj Finance, resulted in much heftier profits.

Why not buy the underlying companies directly then? 

We do buy the underlying companies directly, but we also buy the holding company because the margin of safety is much higher. And we have made huge profits from our investments in holding companies over the years.

Do you invest in cyclical stocks? 

Yes, we do. We buy them when they are very, very cheap, and sell them when they are less cheap. We don’t wait for the fair value to be realised, or for them to be overvalued. Because, in a bull market, you will hear crazy price targets for the same stocks that nobody was willing to touch at one-tenth the price. We should not forget that these are cyclical stocks, and after two years again the cycle will again turn for the worse.

But how do you know when stocks are extremely cheap?

For steel, you should look at what is happening in China, in other global markets, look at the input prices. They will give you an idea. We buy metal companies only when there is a general feeling in the market that the world is coming to an end.

Tell us about your selling strategy

Let me give you a little background. Sometime in the early 80s, I had bought 500 shares of Kinetic Engineering at Rs 30. As soon as the price doubled, my father started pushing me to sell the shares. His thinking was that 18 percent (per annum) gain was good enough and anything more than that was risky, unsustainable and amounted to usury. Finally, I gave in to his wish when the stock reached Rs 80, but on one condition. I would sell 400 shares, but retain 100 shares since we had recovered our capital and made a good profit. He agreed.

The stock eventually went on to hit Rs 720 (adjusted for bonus) in five years. Obviously, you regret when the stock moves up a lot after you sell, but it is not a bad idea to take profits home periodically.

Usually, when clients buy shares, initially, they have a selling target, but as the price moves up, they keep increasing the target. They become possessive about the stock and forget the prudent principles of selling. I keep reminding them about the uncertain nature of the market. Things can change overnight. You have nothing to lose by booking profits. Some clients say they are afraid of selling because they may not get a chance to buy the shares at lower levels. I tell them they don’t have to buy the same stock, there are plenty of other shares you can buy and make money on.

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Have you ever sold a stock and then changed your mind on it?

Auto ancillary company Bosch was one such case. I was bullish on the stock for many years till 2015, and had accumulated a huge quantity. When the price hit Rs 20,000, we started selling thinking it was overvalued, selling our last quantity at the peak price of around Rs 27,000 because a fund was buying aggressively at that point. To date that has been my only best sale, where the price has still not come back to the level I sold at. We thought the company’s earnings were unlikely to grow as fast as before as the world was now moving towards electric.

We had intended to buy it at lower levels, but when prices fell, for some reason, we stayed out. Finally, after touching a low of 7500 when the stock started rising, we began building a position again. Now we are bullish on the stock, because there is better clarity on the company’s business. The diesel fuel injection system engines will be around till 2031-32. And what we had not thought was that if investors could see the hit to the company’s earnings because of the shift to electric vehicles, the company would have seen it coming even earlier and planned accordingly. Today, in electric vehicles, Bosch has gone so much ahead of others.

Do you regret selling stocks early?

While I do sometimes regret having sold shares early on, the approach has worked well on the whole. Booking profits helps you create that powerful asset called bear market buying power. Having learnt a hard lesson in 2008, we had some cash on hand when the market nosedived at the peak of the COVID panic in March 2020. We expected the market to go down to 10,000 and stabilise. But the market kept sliding. We were able to buy some quantity at an index level of 8000 when blue chips were available at unbelievable prices, and we still had some ammo left.

Your worst nightmare that came true…

When the global financial crisis hit (in 2008), my portfolio value shrank nearly 80 percent. It hurt, but thankfully it was not borrowed money, and so we were not pushed out of the market.

Most importantly, it did not affect our lifestyle since we were always conservative in our expenses. But the experience taught me the importance of keeping a part of the portfolio in cash.

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Take us through your misses...

One big miss was the initial public offering of Infosys even though I had a chance of being allotted 500 shares. The late Manek Bhansali, one of the founders of Enam had asked me to apply for 500 shares in the firm allotment portion. I happened to be with Vinod Sethi (former Morgan Stanley fund manager) when he got a call informing him that the Infosys issue had bombed. His reaction was: ‘that’s great.‘ I was yet to apply for the IPO, but Sethi’s reaction made me wary. I did not ask him the reason for that. I wish I had!

Some years later when I asked him the reason, he told me that Infosys issue being undersubscribed was good news for investors who understood the value of the business, as they would be allotted more shares.

Another miss: the massive upside in TTK Prestige. I read too much into a friend’s decision to sell the stock. That friend happened to be a mid-level executive in one of the TTK Group companies. I had identified the stock when it was going for Rs 20, and it had appreciated to Rs 200 over time. I thought that because my friend had sold, he would be aware of something that the market did not know.

I asked him the reason, and he said he was not allowed to discuss matters relating to the group with outsiders, but he wrote out a letter of introduction for me which I could show at the Bangalore plant and speak to the people there to get an idea of how the company was doing. I kept telling myself there had to be a reason why my friend sold the shares. And I was too lazy to take the trouble of going to Bangalore and find out for myself about the company. So I took the easy way out of selling my shares. It was to be a costly mistake. The stock would go on to hit Rs 9000 in some years. And the reason my friend had sold his shares was that he had been planning to go on a Europe tour and needed the money.

What’s your advice to new investors?

Never have a lifestyle that cannot be sustained when stock prices fall.

Accept mistakes and try to correct them instead of saying you are right and the market is wrong.

The primary goal should be to protect capital.

It’s difficult to make very large money through short-term trading.

Think long term.

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