The India Opportunity: Raamdeo Agrawal, Manish Chokhani Say Power Of Holding Is Key To Creating Wealth

Raamdeo Agrawal: Investing is very different from betting. When you say betting, the next half an hour, one hour, the show is over. It is not like that. Investing is a very long process.

When I started my career, I was always investing for doubling in three years and typically took a bet of 2.5% of whatever was my corpus and I am a very voracious buyer. So, everybody has a different style. You will have different style. Everybody has a different style. Somebody buys 150% of the equity, and then whatever net worth. Somebody buys 100% like me and somebody buys 50% debt, 50% equity. Everybody has a different style. I am talking about whatever is your allocation of equity in that what should be the bet size. So, the way I look at it is, I start with 2.5% to 3%. Making it very small has no meaning and will have no impact. But what happens is how long you hold. Like for public money, SEBI says you can't go, you have a passive bridge beyond 10%.

Today itself I was doing some numbers. In 10 years, the index is up about three times, roughly about three times. In 10 years, most of the good companies are up four times or five times. But look at Bajaj Finance. It is up by some 20-30 times, or 40 times. It is absolutely out of the charts. So, if I had bet 0.5% on Bajaj Finance, I would not cut it. But what will happen is, it will become 30-40% of my portfolio. This is what really happened when the boom time comes. So, in 1998, again I went and bought Infosys 2.5%. In 1998-1999, I bought 2.5%. Both of them became 40% each in my portfolio. In next like 24 months, I didn't invest 40%. I invested 2.5%. Just that particular investment was extremely successful. But there were other investments which didn't do well in that period.

Raamdeo Agrawal: I started with 2.5% only. So, what happens is, there is always a case of overconfidence. And you end up buying 9% or 10% also. I did that in one or two of them. It doesn't work. Like Indigo, when it got listed, I bought 8% or 9%. We never made money. I became brand ambassador of Indigo, because their allocation is so high and to keep the allocation at a level where you don't bother about it.

Manish Chokhani: I will take a step back. He is my senior and my guru in many ways. So I will draw from him. All of us make a bet in some sense. When you find a life partner that is your biggest bet in life. So, what it is that you are looking for in that partner and what is going to work for you both are equally important? Why should that partner be right for you, because he or she will have a point of view as well? If you think of it in that context, it is a kind of love affair. We actually invest in stocks because we love it. The results honestly, are more like a mark sheet, which you get at the end of the exam. You are not studying for the marks. You are studying, because you love it. So, if you come with that approach, I think that is the first big thing to take away. 

He talked about bet sizing, which is correct. Nimish bhai taught us that if you don't have a 5% allocation in your portfolio, you will end up with a zoo. Marginal idea coming in has to display something. So, 20 names have to fight to get into your portfolio. Don't make 50-60-70 decisions because you don't have to get so many right. But, when you get it right, the question is, how big you get it right. And even for that, it is a very individual personality trait, like he rightly said.

And if you think of both of us when we started our careers—he started much before me—I remember I was told, yaar, bete ko padha-likha ke, CA kiya hai, MBA kya hai, yeh share marketmein ja raha hain. What a waste of life. And I was very friendly with one very large business house. It was virtually like a guarantee that you would join, and you would be so-and-so's number two and it was a nice, assured life. My father said, your aspiration is to be number two, or to be number one? What do you want to do? And the choice one made was a bet to go to ENAM, which was at that point an unknown place. I think Nimesh bhai was what 35 years old at that time. That is a bet as well, right? You are going with the people for a mega trend, which you see ahead with people you like. And it is no different when you are investing in a company.

So, coming from your own personality that can you walk a path, which is different from your college friends, because they are all in McKinsey, or Goldman Sachs, or Merrill Lynch, and you are going over here. Is that your nature? If that is not your nature, then forget about making bets and equity investments in large size and 5% allocation. They are not going to work for you. If you are looking for a fixed income, if you are looking for an assurance that my portfolio should go up every week, every month every year, I should not miss anything in the market and have FOMO (fear of missing out) each time something goes up, it is not going to work for me. So, this is an ekla chalo re world. We work together with a lot of people, but in our own office Nimesh bhai may have different stocks, I may have different. I don't participate in half the things that he buys and vice versa. Obviously, he is more successful. But it is to have that independence of mind and something which resonates with me. For example, he is a master in cyclical. I cut my teeth on the newer age companies back in the 90s. We had tech, media and telecom even then, and that works for me. I can't buy the deep cyclicals, or the steel and so on. It does extraordinarily well, but the approach to value investing asymmetrical bets is common. I think it will be common with him as well.

He (gesturing to Ramesh) talks of Indigo. We all grew up saying that airlines is the worst business. But he saw the ROI in that business and he walked alone. It may not have worked out, but his process was correct. We talked about Bajaj Finance. It is a common pain point, I think for both of us. We bought it early, identified, financialisation will happen, Bajaj family cannot get better values. ... The narrative that time was we haven't seen a seasoning of the portfolio. It was at that time less than a billion dollars. It is north of $60 billion today. We bought it and it goes to nine times book value. We make tremendous money. We think we are the smartest guys, but how can something be nine times the book value. Someone will come and beat it up. So, the power of holding on was not there. I also sold it. And then Covid happens and then it crashes. You think, wow I was so smart. I was so lucky I got out. And after that, it went up four times. Now, can you imagine something which is up 30 times and then it goes four times more from there. What does it do to you and that is what he means. The real power comes from holding. Identification of companies, bet sizing, I think by and large, most of us will get it right at some point or the other. But that ability to hold on and see what I call terminal value, where this is going to and going through those waves of ups and downs is that what differentiates Rakesh Jhunjhunwala, or Nimesh Shah from me. They were able to see and sit through the whole cycle.

Raamdeo Agrawal: I think the process of stock identification itself. Everybody has a process and it comes over a period of time. When I started in 1987, we were all over. We knew only one thing, PSNP (Productive Safety Net Programme). There was no third ratio; we didn't know. Over a period, we learned. And then, in 2014-15, we said we want to look at QGLP (quality, growth, longevity and price) as a process. So, I can do QGLP of any company in five minutes flat. Then, I am very clear if I am interested in this company. Then you go deep diving. You go through the quarterlies and annual reports. Nowadays, you get edited conference call transcripts. Companies go out of the way to put you on deck on quarterly basis. So, everything you do. Then you go and check, meet the management, you do everything is needed before you say okay, I am in. And after that, you buy. And then, in the process, you either become even more confident or lose interest. Okay, it is not that great, that kind of thing.

So, meeting the management is important, because you are betting on two things—business tailwind and management tailwind. Business tailwind, I can figure out sitting at my office. But management tailwind, you can't figure out till you visit the office and meet the guy and spend time in their office, see their culture, their coffee, their everything. So, there you decide, yeh kabuli ghoda hai, yeh lambi race ka ghoda hai. That bugger is going to really go out on the charts. So, in the same business, you find the guys who have that passion and energy because now everybody is honest, more or less, almost everybody is honest with the GST and all. I don't think anybody wants to mess around. So, the honesty part is more or less taken care of. As for competence, everybody is not as competent in the business. You can also see their competence in the financial statements, but do they have that passion and the urge to, really grab the market share or do something which is in this growing economy again, grow at 3x, 4x.

PSU banks grow below the industry average. While the industry is growing at 12%-13%, they will grow at 7%-8%. Then, there are banks which grow at about 1.2 times. And then there are banks which are saying we will grow at 2x, 3x. HDFC said that in 1995, our formula is to go 2x; 15% credit growth, we will grow at 30%. You see what has happened. This is how by interacting you come down to QGLP—quality of business, quality of management, growth, longevity of growth, longevity of quality. And then, having set all these four, then look at whether the price is reasonable or not. Sometimes you hit very low prices. Sometimes you are reasonable. And sometimes, it is absolutely high. And then too, we get stuck, yes. We bought all the digital companies at the top. So, it is not that we don't commit mistakes. Despite all the research and all, we commit mistakes. But that is fine; it is 2.5% % only.

Raamdeo Agrawal: See, earlier there was an access and privileged position in terms of information. Even getting balance sheet was very tough. But now, with the quarterly conference calls, and decks being given by them, and then with the continuous Q&A sessions, nothing is left. It is just that we are old types, and we want to meet them, and see them. You can go to YouTube and search for a company and even on the company sites a lot of interviews are posted. Most of the good CEOs are being interviewed by you, and everybody in the television. It is there.

Raamdeo Agrawal: More than just sufficient, but if you can have one-on-one discussion, it just gives an edge. Little bit, not much.

Manish Chokhani: So, to the first question, my answer was 2.5% to 5%. That is just a number. So honestly, if I don't feel like I want to buy 5% I usually will not do it. And two-and-a-half is really the starting point. It is kind of, you buy the two-and-a-half. Then you sleep overnight and see how it feels, because something tells you from inside that I want to go for five or not. There are times—and he is right—where you feel I can bet the house, I can go 10% on this. And both of us, I don't think we take leverage. There are people like others who will not buy two-and-a-half, but they buy a levered two-and-a-half. But for every person who has become a billionaire, there are 99 million people who have gone to the streets. 

And honestly, in business you make money either by margin, or by velocity, or by leverage. Velocity is really all our fellows who are buying and selling every day. I don't think it leads you anywhere. Leverage to me is, I am not in a hurry to get rich. It is a country with tailwinds behind us. If we follow the process, we basically will beat the market because you know what to avoid. So that itself is good enough. So, if you focus on margin and asymmetrical bets is really the heart of it.  

You asked for an example. My son had a small allocation and he brought out a company which was at that time of Rs 1,500 crore market cap. It had already delivered around Rs 150 crore PAT and it had a 35% RoE and on whatever we could see of capacity growth, you could see Rs 400 crore as possible for this company in three years. Now, to me, that is a no brainer. And it is a bet that he took, which should be 10% of his portfolio. It is doing well and it is not part of a mega trend or a theme but it is something which fits into your macro understanding of where this business is going, where the world is going and it meets the promoter criteria, the business criteria, capital allocation criteria and so on and so forth. You would take that bet. So that is kind of answering your question one. Your question two really is, how long you hold on to it.

Manish Chokhani: Disbelief is right or wrong. Even the person we all grew up reading about, Warren Buffett—he made tremendous money in Coca Cola and for the last 23 years, it has compounded at 2% and he is still holding it. So even currently, we look at so many companies which have done whatever on consumer stocks in India, they are all quoting on 60-70  P/Es. They are great companies. But are they great investments? I would question it.

My son, when he came back again from his education abroad, he said, “Dad, all this is great, but has India ever surprised you on the upside, on consumer companies?” And we used to have discussion on two very obvious themes. Half of India is male, young population and there was the narrative that everyone has to shave. Twenty years later, I look at Gillette and I wonder what happened, where did all these people go. Like everyone is not growing a beard like Virat Kohli. What happened? Where did this opportunity go? The other half should have been using P&G sanitary napkins. Where did that opportunity go?

So, for every Titan which has worked out, you wonder like people are buying gold jewellery but aren't they buying, shavers or sanitary napkins. Something works, something doesn't work. He (gesturing to Ramesh) famously narrated his example of Eicher which he bought for X reason and the Y reason worked out. But it worked because it was still an asymmetric bet, because the entry price was so good. That, and then, like you do in a marriage. You have to stay deserving of each other. So as the company does well, we update ourselves as well. Do we want to carry on? How is the bet looking? And in my head, I always think, if this falls 33%, to come back to this price is a 50% rise and at that 33% fall, am I a buyer? And when I don't find that answer resonating, it is typically when I will say time to say goodbye. And you may miss it, and I have a lot of regrets about what I just mentioned, you know one for example. But I would rather sleep happily at night than live with regret that I had a great exit opportunity and I didn't take it because of greed.  

So, eventually this business to me is a lesson in finding humility. Each time you make a new mistake, each time you think you are super smart; you get whacked by the market. So, you just take the previous lesson, dust your shoes, and walk on, and find the next field to conquer, and the next mistake to make. Because, if you just sit at home and keep doing the same thing, you are not going to end up anywhere.

Raamdeo Agrawal: Higher price is not a problem for me. As the facts change, the price will change clearly, and your understanding also changes. So, if I bought some company today, and maybe I don't have enough quantity, and I am saying that I bought 1%- 1.5% and I am thinking that let it progress, because a lot of research happens after you buy. And so, you start filling in one quarter, two quarter, one year, two year and it is working better than what you thought. And new facts come. And then you realise that actually we are doing exponential. You will realise a lot of things because you are an investor and you are actually keenly interested in what the other guy is saying.  

Where do you make money? Where the growth happens exponentially. India is growing at 6%-7%. That is not exponential growth. That is a linear growth. But in 6% growth, there are businesses which will go at 12%. And there will be companies which will grow at 25%. And there will be companies which will grow at 36%. We have to be lucky in our portfolio. See, I would like to have 10 out of 10 in the 36%, but that doesn't happen. We think that we are going to buy into 25%, but it turns out to be 5%. So we have to take whatever is in our basket. And you have to become lucky. See, luck part is very important.

He told about Eicher. The guys told me that they will be now the next leader of the trucks, because this BS6 is coming and these guys don't know anything. We are the guys who are in the forefront. So, we will become the number one truck company. So, we went, saw everything, we bought another truck company. Little did we know that it was a fat-fatiya company.

So, what worked? We knew that it is there, but they are making Rs 60-70 crore profit in that. But that became the mainstay and we stayed on. So, from that Rs 2,000-3,000 crore market cap, it went to Rs 85,000-90,000 crore. So, you know that kind of thing happens, but we have good stocks, good business, reasonably good management. Storyline would have been somewhat different, but at a reasonable price and you sat through. So what happens is, when I am saying 2.5%-3%, I don't have 30 stocks. I am very comfortable with 5-7-10 stocks, 20 stocks, because something which is done earlier that has occupied a lot of space and then I don't want to sell it, I hate to sell stocks. Actually, I hate to sell stocks and that is why I overstay. So, I overstay, that mistake happens. Like, I sat through Hero MotoCorp or even Bharti for much longer period than I should have.

So one is that, in some cases, you have seen the peak and then you sell at 30-40% lower. Do you make 25-30x, but still, you are not anywhere close to the peak? Second, you got the peaks, but you overstayed for 10 years. So again, your IRR comes down. So, all kinds of things will happen. But basically, your IRR in the portfolio changes only when you hit upon one or two big ones. And that happens partly by the process and partly, because of luck. But we buy things where there is a possibility of that happening. Whether it will happen here or there, nobody knows.

Manish Chokhani: I will just to add. While obviously, luck is a very, very important factor, but it is because I always say when preparation meets opportunity, we call that luck. Because he has done the work and he is hunting in the right field, he is going to get lucky. The odds are that he will get lucky. But if someone just decides I will land up today and I heard something somewhere and I can make a 10% bet and I am feeling lucky today, like someone goes to a casino, that is not going to help you.

So, what he calls his personality type to be able to go through that volatility up and down, which we all have to live with. We are not fixed income guys. If you ask us questions on debt, we will fall asleep. We are happy. Whatever dividend we get by God's grace is more than what we need. Three years of income is always kept aside for a rainy day and that gives you freedom to do whatever you want. You are not under pressure to do stupid things. But then, when you start saying how do I prepare what he calls business analysis, part one, are you on top of the game there. What part two, we call management, I call it the five Cs. Does this guy know capital allocation? Does he know culture? Is he properly compliant? Does he have a view of customers, products, what is coming, new technology, whatever to be on top of it? What about the competition? How do they play that and do they have rigour?

Sometimes people get lucky in one cycle and think I have achieved everything in life. But rigour, which in our management team, a lot of our colleagues will love. I used to call it target, plan, execute and review. And if that management cycle is not going on continuously in a company, however great they are, they will falter. The best companies which we stay on are what I call relentless. We are again using Bajaj Finance's example, because that man, for 16 years, relentless. To give money is very easy in India. Anyone can do it. And now, people are giving money on the basis that I can give you money in 10 seconds. What is the rigour? The algorithm is not going to go and do your collection for you. Where do I want to target it? What pricing? What costing? What is the risk metric? How do I supersize it for that particular niche. That is rigour.

In old days, we used to talk of example of Infosys. It was all about execution rigour. Those companies which really become wealth creators, and if the culture is right, and the people will stick on, they will become millionaires themselves. How do they behave when they become wealthy? Do they lose their frugality? Do they go crazy on their capital allocation? Are they then starting to buy jets? Are they making acquisitions abroad? Those start changing your thesis? So, the company has to stay deserving and I have to say deserving but I have to stay on top of it. I can't just make the bet and go to sleep. I will come and see it six years later, because someone else made money by just sitting on stocks. It doesn't happen like that.

Manish Chokhani: I think, we both said 10%.

Raamdeo Agrawal: The issue is that, actually, the serious money is made if you are continuously invested. You can sell a stock but don't sell out of the market. You know, for your mental satisfaction, you have booked the profit. You bought on 100, and you sold it for 200. You book the profit, pay the tax, but still the Rs 200 you got, I would request that you just invest it before even selling, because India had a component past, it will have a component future and there is a compounded investment opportunity.  

So, if you sell out and you stay away from the market for 2-3 months, you don't know. The market might move up by 20-30% and then you can never catch it. So, I don't know when it will move. All the charts keep telling us, but they will always say both sides. It will go up by 500 points and if it doesn't go up, then it will go down by 500 points. Bhai, mein karoon kya lekin? So, I think you will have to do your own stuff. You have to remember that what has worked for me is 100% invested, all the time. But, I do sell my stocks. In the sense that if a stock has done well or not doing well, I am getting bigger yes, I do change, but I remain invested in one stock or the other.

Manish Chokhani: I have a slightly different answer. I find in bubble, phases, which Naren was talking about, and we live through some climatic bubbles. And I remember, I started my life with Rs 7 lakh. Just when Harshad Mehta bubble happened, and you could see this is completely nonsensical thing going on. And fortunately, no one was greedy. No one was buying any crap and so on. And we were out three months before the peak from everything. 

I basically sold everything and didn't come back to the market for one year. The next investment happened only in April 1993, one year after this whole crash had happened. That taught me a startling lesson. While I am reading Warren Buffett, the reality of our emerging market is slightly different because they don't have stock operators of that kind in the developed world.

My second experience was in the 1998-2001 TMT bubble. Again, famously the story I have spoken about earlier so I can share it again. I used to be the analyst for Zee TV. When the business was written, I had written the business plan for them on the banking side and six years later, the company was available for Rs 150 crore. It was a Rs 16-crore equity and Rs 80 price, something like that. And like this is a no brainer, asymmetric bet can't go wrong. And I buy as much as I can. I was a small analyst in those days and voila within 18 months to two years, it was up more than 10x—a Rs 70 stock had become Rs 800 and I thought like I am the genius of the word. And I sell it. That is the era of Ketan Parekh. It goes in the next three months from 800 to 16,000. Now, imagine, assuming it was Rs 1 crore and has become 10. But now, in 10 goes up 20x. It could be 200. That is the extent of miss which you miss in a bubble phase.

But you also know if I don't sell somewhere. Manik bhai, our founder, taught me that when you have a fundamental pick and it is going up, you please shift in your head to the technical side and you now see what the market is telling you. Don't sell on rising tops and rising bottoms. Sell on the way down. It is okay if you sell 30% down, 16,000 at 33% down is still 10,000, compared to 800. So that was the second lesson on selling. Third lesson is when the cab drivers start giving you tips like during the 2007 bubble which was happening, or we are having crazily priced IPOs and everyone and his uncle seems to be making money and you can't understand. I remember I went through a phase thinking maybe I am getting old and people now are buying stocks like they buy art. So, there is no price which is high enough for Bitcoin, there is no price high enough for Tesla. You know, maybe one should just get out and sit on the side. That is the time you should be selling. But I would sell, sit for three months because the urge to reinvest quickly is very high but in those three months you go to the countertrade. That is typically, where you find bottom.

So, 2001 top when we sold, we bought a lot of these PSUs which was selling for cash on the books. So, BEL, Concord, Grasim, SBI all were dirt cheap. Same way in 2008. The bull-run was in all these commodity type and infrastructure type companies. The trade on the other side worked out well because TCS was cheap. Pharmaceutical stocks were cheap. So, every bull market ends, and a new bull market starts in something else. And you get great opportunities over there and like he said, asymmetrical bet, the price has to be so good. A sector I don't like, currently it happened with real estate. We have all hated the sector for the last 15 years. But great sector to be in with the coming of RERA, with the cleaning up and what we all went through in Covid and few people coming out. Few guys are left who know how to do capital allocation. Maybe a great place to be. I am not personally invested there but we saw it. We talked about it, we just enact. It is a bit like this airline phobia. I didn't buy Indigo. I didn't buy real estate, but you can see the tide has turned over. So that is an example if it helps.

Manish Chokhani: Our markets are still in a boom phase. It is not a bubble phase.

Manish Chokhani: The easiest answer, it helped me enormously and I hope everyone does. If you can, take 10 days and go for a meditation camp. I went to Vipassana. No, I am not joking. What happens, you will experience it yourself. I experienced it that you see everything is an impulse, it comes, it rises, and it passes away. It may be greed, it may be fear, it may be love, it may be anger, it may be regret, it may be emotion, whatever. Everything passes away. It will actually make you a lot more economist as a person and equanimity is what you want in a market where you are dealing with emotion.

People rightly said that the intersection of greed and fear is the stock market and if you are an economist, you can take advantage of that. But if you are on one side of the trade someone else will take advantage of you. So, I really seriously think and it is not a joke, but a serious suggestion. If you really want to have a balanced temperament to invest, spend time in meditation. If you want to take a recommendation of bigger guru, read Ray Dalio and others who also spend enough time daily on meditation. I hope that helps you.  

Raamdeo Agrawal: See, I am reconciled to 12% market and whatever better you can do. So, if you are sitting with a portfolio—because I am not the churning type—I don't go to the screen every day. So, I have done my homework. I have allocated and let the quarterly results or whatever happens, let it be. I know one thing. If you have a diversified portfolio of even 10-15 stocks, if the market does 25% you hope to do a little better. That is it. So, you know, just jumping with a 10-20 times you see the price, or you are becoming impatient, or some headlines are there, some crash is there and just becoming impatient will not help your portfolio at all. You have to get reconciled mentally.

The market is also an index. What do you have in portfolio is also an index and there is an index which is Nifty or BSE 500. So, you have to be reconciled that finally in 4-5-10 years, you are going to make Nifty plus and that is your competence or patience or whatever you say. So, I would say the best guys will make about 15% and extraordinary guys like Rakesh and all, they make today 20-25%. So, you will fall somewhere there and that I am reconciled. I am more like 12% to 15% kind of guy and then, uss ke up par se aayega toa bahut achha hai.

Manish Chokhani: You have to send your fifth position, the least likely one, and convert to your 100, if that's what you believe. You are finding your 100% opportunities better than your 50-opportunity compounding. I personally can't find those but if you have five like that, it is a good problem to have.

I want to say one thing though, a lot of the crowd here is actually below the age of 30. I just want to make one point, if you take the 100th company in India, today by market cap, it would be $8 billion market cap roughly and the owner would have at least half of that company. So that person is worth $5 billion. The most successful investor we talk about in India did not have that number. Just by a frame of reference.

When you say you are young, you want to take a bet and you have 20 years ahead of India in a golden period. This is the time to build a business. When we came to the stock market, we were the pariahs of our families, that is why you are going there. Right now, if you go to build a business, people who think you are mad, everyone who wants to build a family, office, everyone wants to be in stock market. The contrarian thing now is to go and build a business and the opportunity for wealth creation in something you can own 100% of is far crazier than buying 2.5% of something which is fairly well discovered. So, it may work for him and me at this age. But if I were young and I were 25 I would be building a business. I would not be coming to the stock market. I hope I can get that resume.