Market valuation still at comfortable levels but the job of picking stock has become tougher, said Raamdeo Agrawal, Joint MD, Motilal Oswal Financial Services in an interview with CNBC-TV18.
We bring to you his 5 guru mantras from the interview:
Be choosy in what to buy
Stock picking was easy sometime back but after the recent rally finding stocks at the right prices has become tougher. “When the Nifty was trading at 7,000-8,000 levels, the job of picking stocks was easier,” said Agrawal. Now, investors have to be more careful in what to buy at what price.
“Most of the investors now know what to buy but that may not be available at your price. Finding good things at a reasonable price is the biggest challenge in this market which makes the job even tougher,” he said. Finding big idea has become difficult.
Construction boom is coming, timing is key
Raamdeo said he is not into real estate stocks right now but trend seekers should always be on a lookout for sectors which could outperform. For example, the construction boom is imminent, but timing remains a key. Underlying stocks can surge very quickly whenever that happens. If investors pick stocks from depression stage, the returns are usually exotic.
Don’t be carried away with averages
The market might be trading at 22x, but there is hardly any company which might be trading at a P/E of 22x. Averages have one fundamental quality that the distribution of the population is presumed that 50 percent on one side while the rest on the other side (normal distribution).
In a stock market, when you are saying that it has done 18 percent where 4000 companies are listed, it is assumed that 2000 companies would have done below 18 percent while the rest 2000 companies would have done above 18 percent. But, the world is not so simple.
Markets are skewed which means that 10 percent would do 80 percent of market performance and the rest 20 percent will share the rest. Out of 4000 companies, only 400 companies would contribute about 70-80 percent to the market cap growth and the rest will share the average. While operating in the market, don’t be carried away with averages, explains Agrawal.
Select winning companies:
Agrawal emphasised on the fact that investors should not be concerned about companies which are not in their portfolio. Instead, they should handpick, let’s say, 20 companies which can be called as winning stocks.
To explain the concept from the book he just read, he took the example of Dow Jones Industrial Average between the period of 1976-1982, Dow moved in a narrow range but Warren Buffett’s portfolio grew by 6 times.
“It means that even if the market is down by 5-10 percent, it is the job of active manager’s job to put money in those stocks which can grow irrespective of how markets perform,” said Agrawal.
Pick stocks for the long term:
Agrawal said when we buy stocks we buy for the long haul. “None of these companies (Avenue Supermart, RBL Bank) were created for 2-3 quarters and prices are not such that it can’t grow,” he said.
If the valuations are high then prospective returns in the short term will go down in companies which are expensive. But, it will be attractive in long term such as 10-15 years, he said.
Agrawal further added that we try and pick stocks with reasonable valuations so that out short term return is reasonable and is very attractive on a 3-5-10 year’s basis. Hence, we buy stocks with 10-15 years horizon.
Below is the verbatim transcript of the interview.
Anuj: I know next month you will be going to Berkshire AGM, so, good question to ask you -- are you comfortable with market valuations right now, especially with the fact that earnings have not caught up yet but are you comfortable?
A: I am always comfortable with the market. It is no issue. We have to only see in a change situation how do you play. When market were at say 7,000-8,000 job was easier. Now you have to be even more careful what you buy at what price because now most of the guys they know what to buy, what is good, but you want to buy is not available at your price. So, then you have to find something.
First thing you will find very few things which are good and which probably might be reasonably priced. So, finding good thing at reasonable price is the biggest challenge in this market. So, that makes the job even tougher and you have to be far more focused. We have done nothing for last six months, we are just doing whatever we had done and sitting on that, or buying more of that. So, finding some big idea and piling onto that, that has not happened. So, it is becoming difficult.
Latha: What is the 12 month trailing valuation of the market, the multiple of the market now, just to get us down to reality, are we at 22?
A: Must be about 22-23.
Latha: At this juncture, let me come to some of the sectors that people appear to be discovering, real estate.
A: I am not in that. People will find as I said, different spots where things are changing and those who are early trend seekers, some of the sectors will definitely turnaround. Maybe one of them will someday PSU banks, some day real estate, or even the metals, we saw last time steel came back very strongly, maybe someday cement has to be -- it is overdue that cement comes into limelight because without cement in the steel, construction boom has to start one day. Whether it is six months away, six years away, only time will tell. However, that boom has to happen.
So, underlying stocks can surge very quickly because when you buy from the depression, generally from very bad to bad is a very exotic journey. You saw yesterday, all the realty stocks, people hammered for months, years they kept hammering, yesterday the first flush was 10-25 percent, I think one stocks was 40 percent. So, those kind of fireworks do happen.
Sonia: Every time you come here you teach us something new in terms of market wisdom. I want to know have you read any recent books where you can sort of impart some wisdom in terms of market, anything new.
A: I am always reading. Every 15 days I finish a book. It is the books only from where you learn. I finished book called ‘Investing: The Last Liberal Art’ by Robert Hagstrom. There he talked about the averages. What is the average? Say 22 or whatever. These are market averages, but if you go into that, there is hardly any company at 22 price-to-earnings (P/E). What happens is, one of the biggest myth in the market is that index has done at 15 percent for last 34 years.
Averages have one fundamental quality that the distribution of the population of which you are taking out average, it is presumed that 50 percent is on this side and 50 percent is on other side. So, stock market when you are saying it has done 18 percent, and 4,000 companies are listed, generally it is assumed that 2,000 companies would have done below 18 percent and 2,000 companies would have done above 18 percent. However, the world is not so simple.
Always markets are right skewed, it is skewed market, so what happens is, very few companies, 10 percent will do 80 percent of the performance and 90 percent will share that 10-20 percent. So, what happens is that out of 4,000 companies, about 400 companies would contribute almost 70-80 percent of the market cap growth and 90 percent will share the average just for the sake of name.
Latha: Is that one of the wisdom of that book?
A: Yes, that is one of things I learned. There are a lot of things in that, but kind of I was aware in other places. What it means is that while operating the market, don’t be carried away by the averages. What he is saying is when you say market is up or market is down, he has given an example, between 1976 and 1982 market remained at 757 or 787 in Dow in US.
During that period Warren Buffett’s money grew by six times. So, what it means is that market is down by 5-10 percent, that does not mean anything in the marketplace. Those 200-300 companies are growing continuously. It is the active manager’s job to figure out whose winning companies and put one’s money into them and make money.
Anuj: You have identified some of these companies in the past. Your own portfolio has done well. I just wanted to discuss, you have taken a big bet on Avenue Supermarts (D-Mart) and RBL Bank. D-Mart I think you got anchor allocation as well. That has done well now and is trading at phenomenal valuations. What do you do with these bets now?
A: That is the dilemma in the sense that what we have is very small portion of the fund and typically we like to be 5-6 percent of the fund. So, we have only 0.5-1 percent of the fund. So, we will wait for our time.
Anuj: On RBL Bank?
A: RBL is there. It is doing well.
Anuj: But its 5 times price to book doesn’t concern you?
A: We have not bought it for six months, eight months and all. We are in there for long haul. None of the companies are created for two quarters or three quarters, and the prices are not such that from there they cannot grow. However, what happens is when your valuation is high, your prospective returns go down. Now, prospective returns in the companies which are expensive, their very near term return, one year, two year return is going to be very bad. However, 10-20 years return is going to be still reasonable.
So, what we are saying is that we will not start at very expensive valuation, we will start at reasonable valuation so that our short term return, prospective return in 12 months or 18 months is also reasonable and it is very attractive on a three year, five year or 10-year basis. So, we don’t want to buy a stock which is in or out in six months or one year or two years. We fundamentally start with 10-20 years horizon.
Latha: Let me come back to the theme that the market is now very excited about. You spoke about this possible construction boom, maybe because of housing. How are you playing it, you told me you are not into real estate, is cement the way to go, housing finance companies?
A: Housing finance is one because all the houses have to be funded; now even rural housing has to be. I think there will be only few good housing finance companies but there will be so many cement companies, so many steel companies, so many contracting companies, so many house owners, what to buy? You can buy either the aggregates like paints, cement, or fittings, those things you can buy, air conditioners, fan makers, whatever goes in the house, bed makers.
Latha: Jalaj Ashwin Dani has left Asian Paints, you are not worried?
A: In these kind of corporates these kind of things keep happening. The whole promoting management team is now away and only professionals are managing. So, I think it will have not that much kind of an impact.
Sonia: You have never been very high on Reliance, I have not seen it in your funds for many years, but it is now as of today, it has overtaken TCS as the highest market cap company. Do you regret not buying it in the last six to eight months?
A: Not at all. I need to know my 20 companies, and that does not mean that only 20 companies will perform, there will be another 180 companies which will also perform. Today I can miss about Reliance, tomorrow I can be missing the Indiabulls, there are thousands of companies which are doing well and I don’t have them.
So, I have to regret if my 20 companies don’t perform. In fact it took me 35 years to focus your 20 companies, don’t focus too much on the companies you don’t have. So, it doesn’t matter. The day on which we get confident about that stock, we can get in that stock any moment.
Latha: One more theme which everybody plays GST, the informal will become formal types. How are you playing that if at all?
A: Let it come, still three to four months away. There will be enough chaos and in that chaos we will try to find who is getting hurt. GST once rolled out, it is like a broken egg. You cannot roll it back and I am quite sure there will be difficulties and it is not going to be everything just day one and everything is perfect.
So, as it is rolled out, we will see because first time it is happening. So, where exactly is the impact; I am quite sure the good companies will become better and big companies will become bigger. That looks to be the theme and we are generally in all the leading companies in that respective sectors.
Anuj: The next big bet, AU Financers IPO in next one month. I think you hold it, you have been early investors of course, what is the big story here?
A: These is another banking company which will benefit out of the private licence and the PSU segment that is two thirds of the bank which is -- so value is migrating from PSU banks to private sector banks and among private sector banks you have all sorts of banks like HDFC
, Yes Bank
and so this whole list is there.
This is a growing industry, so, now this is yet another new kid in the block who has got the licence and they will roll out. Till now they were regional NBFCs, now they will roll out as a bank and you have to see the progress of this management team, how well they can do.