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The sudden death of billionaire investor Rakesh Jhunjhunwala (RJ) at the age of 62 has led to numerous media articles extolling his investment prowess. These accolades from investors who personally knew or closely followed RJ’s investment moves over the years offer interesting insights into how a young chartered accountant who started with a modest sum of ₹5,000 or so in the mid-eighties managed to amass an estimated portfolio of over ₹31,000 crore at present.
Every time a star investor like RJ passes, personal finance writers and investors try to extract investing lessons from his career for retail investors to follow. But for me, the main message from RJ’s interviews and confessions is that while we as retail investors can take inspiration from him, it would be unwise to believe that we can copy his investment moves to reach his level of wealth.
Leveraged positions
People familiar with RJ said one of the key methods by which he was able to build a portfolio of over Rs 31,000 crore was his audacity and sheer risk-taking ability. In an interview with iThought Advisors, veteran investor and educator PV Subramanyam recalls how he and RJ as young CAs spotted Tata Power shares trading at a high dividend yield around the same time. While Subramanyam bought 50-100 shares of Tata Power to take advantage of this, RJ borrowed money to take a leveraged position amounting to several thousand shares of the same stock. But he was a responsible risk taker. RJ’s calculated bet was that its dividend income from Tata Power would more than cover its interest costs.
In his interview with Moneycontrol, Ramesh Damani, a close friend of RJ, recalls that early in his career, when RJ did not have much of his own capital to deploy, he would not have hesitated to raise debt capital to acquire large positions in stocks he liked. But he took leverage when his market view was bullish and stayed away when it was bearish. These tactical calls would be very difficult for both retail investors and professional fund managers to replicate.
Using borrowed money to build a stock portfolio worked for RJ because of his exceptional ability to gauge market direction and ability to spot winners. For a retail investor with less sophisticated stock-picking skills, building either a trading or a long-term stock portfolio out of leveraged money would be the road to doom.
Trading and Investing
RJ was one of those rare people in the markets who was equally at ease both trading and investing in stocks. During the eighties and early nineties, RJ acquired both short and long positions in shares of the Calcutta Stock Exchange. These successful trades generated a substantial corpus, which he later used in long-term stock bets.
In his interview, Damani notes RJ’s uncanny ability to predict bullish phases in Indian markets, whether in 2003, 2008 or even as recently as March 2020, which has made him a winning trader. He notes, “To be a trader, you have to have an extraordinary ability to understand where the market is going. I think it was a God-given ability. The second thing, of course, is that these guys are beasts in the market. Rakesh was 24×7 in the market. He would go for his morning walk and discuss markets, come to the ring to discuss markets, have lunch and discuss markets, go for a drink and discuss markets. Trading is an obsession. This cannot be done intellectually.
RJ’s commercial mindset and obsession with all things equity have also played a large role in his success as a long-term investor. When his bets fail, he will quickly admit the mistake, relax the position and nonchalantly shake off the losses to start his next position. When he saw that the stock idea worked, he would not hesitate to double, triple or quadruple his holdings at much higher prices.
But very few retail investors can either bring that passion to the markets or be adept at both trading and long-term investing. It would be best to decide early in your career what temperament is best for you and stick with it.
Investors who bought RJ stocks like Delta Corp, DHFL, Jaiprakash Industries or A2Z Infra Engineers and made losses can probably vouch for this. While RJ may have bought these stocks as a short-term hit or sold them quickly when they didn’t perform, the retail investors holding him would hold out until the damage is done.
Concentrated bets
Along with stock selection and a long-term approach, risk management is an important attribute for retail equity investors. But details of RJ and his associates’ holdings from public holdings data make it clear that he didn’t follow too many rules for portfolio construction or concentration. A Business Line analysis shows that RJ and its associates held 32 stocks with a combined market value of over ₹31,000 crore, based on June shareholding data. Just three stocks of Titan Company, Star Health and Metro Brands account for nearly 67 percent of the total value of over Rs 31,000 crore, with Titan alone accounting for 35 percent.
RJ’s portfolio composition shows significant concentration risks. But holding such a concentrated portfolio would be very risky for ordinary investors with less conviction and lower success rates on their stock bets. After all, SEBI limits individual equity exposures in diversified equity funds to 10 percent and sector exposures to 25 percent and this would be a good risk management strategy for retail investors to follow as well.
Connection management
All famous investors in India and abroad, whether it is RJ or Warren Buffett, have easy access to company manuals, which not only helps them get a unique insight into the business, but also gives them the leverage they need to influence on corporate actions if they decide . When an RJ-ranked shareholder seeks a management meeting or asks questions in an investor conversation, he is bound to get an answer that a retail investor can rarely hope to muster. In the Indian context, despite SEBI’s strict insider trading laws, news of impending corporate action often circulates through the investment community before it becomes public knowledge.
Goliath investors like RJ also have dedicated and highly qualified professional teams that identify potential investment candidates and present them with all the facts they need to take big bets. However, if you have a full-time job outside of the markets, this type of due diligence is difficult to accomplish. Nor can you track the markets 24/7 to target attractive stock entry or exit points.
Overall, retail investors can take inspiration from RJ for his unwavering belief in stocks, his passion for capital research, his ability to absorb both his gains and losses.
Published on
August 20, 2022
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