Advice From Jhunjhunwala

By Ramesh Akkineni

Has the approach to investing changed over the last 10 years in anyway? Can you tell us about your own investment approach - and how it has evolved over the years?
Surely my approach to investing has evolved over the years. Investing requires continuous learning.

I look for the following characteristics in my investments: external opportunity - size, attractiveness and addressability; competitive advantage - ability and sustainability; scalability - people, processes, planning and positioning; operating leverage - sensitivity, efficiency and allocation, and valuations - reasonability.

The global perspective has been a key component of evolution in the investing approach for the Indian economy, corporates and capital markets.

CIO: Thank you for giving us this opportunity to be with you today. Could you begin by giving us an insight into your investment philosophy?

Investing is a process of discovery

Rakesh Jhunjhunwala: I think that the first thing we need to realize as investors is that we know the price of everything but the value of nothing. Investing is a process of discovery. We are constantly trying to determine where the price is far lower than our perceived value. When we believe that we have found such a security, we invest in it. But like I said, while we know the price of the security we don't know its value for certain.

As far as investment philosophy goes, I think I am still very young, have made a lot of mistakes and still require a lot of maturity. I haven't really developed any philosophy. I believe that the hallmark of modern society is its ability to anticipate change, prepare for it, accept it and benefit from it. So I think in today's times an investment philosophy has to evolve with time. Nevertheless, there are certain economic principles that I apply to my investments. Let me share those with you.

The three gems - external opportunity, competitive ability & scalability

When I analyze a company, I first look at its external opportunity. Infosys may not have been such a great company had it not been for the explosive growth in information technology. So, the first thing that one needs to examine is the possible market for the product that the company makes. The second important aspect is the competitive ability of the company to tap the market opportunity. Third is scalability & integrity. I think scalability is very important because companies do not necessarily grow when they get bigger.

Go bargain hunting as a buyer

Once one has examined the above three aspects of the business and one has found probable avenues to invest in, one needs to decide whether or not to invest. For that one needs to look at valuation. Valuations could be absolute or relative. When most of us invest, we tend to go into absolute valuations rather than relative valuations. While it is necessary to go into absolute valuations, one should look at relative valuations also and pick the most attractive stocks.

Don't wait for a greater fool as a seller

Similarly, in a bull-phase when most stocks begin to appear overvalued in absolute terms, we do not sell. During such times, we begin to look at relative valuations thereby justifying our holding the stocks. That I believe is again a mistake. See when we buy a stock, we do so because it is cheap. By the same logic we should sell a stock when it becomes overvalued. Yes, while buying we may look for cheaper stocks within the set of cheap stocks. But when the stocks that we possess become overvalued there is little logic in holding on to them because on a relative basis they appear cheaper than others that we do not necessarily possess.

These are a few things that I have learnt about investing by trial and error. Let me add once again that I make a lot of mistakes and I am still evolving.

Popular posts from this blog

It Pays to be a Nervous Wreck

By Ramesh Akkineni
from an article in Livemint Two weeks ago, Microsoft issued the sort of quarterly report usually seen of a company in finest mettle. Redmond’s sales were up 15% and profit double that, excluding certain deferrals. And the rest of the year, it projected, would be just as sanguine—certainly unlike in the economy as a whole. Elsewhere, that would be a mandate for staying the course. In Redmond, though, they were crossing off days on their calendars, waiting until Friday, the first day of February and thus the first opportunity Microsoft would be able to truthfully state, “Okay, Yahoo, it’s been a year since we talked to you guys; where’s the beef?” Microsoft remains obsessed about Google because it reads the same things everyone else does about how Google’s style of free, “in the cloud” computing means the slow and steady decline of Windows and Office. That’s a technical debate, one in which both sides have good arguments. But....
Read more

Korean Model

By Ramesh Akkineni
from an article by Ha-Joon Chang in the Guardian In my lifetime Korea has lived through one of the greatest development miracles – half a century ago, its annual per capita income was around £50, less than half that of Ghana at the time. Today, it stands at £12,000, putting it on a par with Portugal and Slovenia. How was this possible? Korea of course did things that most people agree are important for economic development, such as investment in infrastructure, health and education. But on top of that, it also practised many policies that are now supposed to be bad for economic development: extensive use of selective industrial policy, combining protectionism with export subsidies; tough regulations on foreign direct investment; active, if not particularly extensive, use of state-owned enterprises; lax protection of patents and other intellectual property rights; heavy regulation of both domestic and international finance. The Korean experience shows that sustainabl...
Read more

Maxims from Poor Richard 3

By Ramesh Akkineni
Image
from Poor Richard's Almanac, 1735 Look before, or you'll find yourself behind. Bad Commentators spoil the best of books, So God sends meat (they say) the devil Cooks. Approve not of him who commends all you say. By diligence and patience, the mouse bit in two the cable. Full of courtesie, full of craft. A little House well fill'd, a little Field well till'd, and a little Wife well will'd, are great Riches. Old Maids lead Apes there, where the old Batchelors are turn'd to Apes. Some are weatherwise, some are otherwise. Dyrro lynn y ddoeth e fydd ddoethach. The poor man must walk to get meat for his stomach, the rich man to get a stomach to his meat. He that goes far to marry, will either deceive or be deceived. Eyes and Priests Bear no Jests. The Family of Fools is ancient. Necessity never made a good bargain. If Pride leads the Van, Beggary brings up the Rear. There's many witty men whose brains can't fill thei...
Read more