This article is part one of a three part series where I take stock (non pun intended) of Rakesh Jhunjhunwala and his stock picking model. In part 1, I shall look closely at not just the multibagger stocks Rakesh Jhunjhunwala bought in his early years but also delve into the valuation models he utilized and what influenced his investing philosophy.
A Young Rakesh Jhunjhunwala & Fascinations with The Stock Markets
Rakesh Jhunjhunwala was born on 5th July 1960 in Hyderabad and grew up in Mumbai. Son of an Income Tax Officer who too had an interest in stocks, a young Rakesh Jhunjhunwala started dabbling in the education of stocks while still in college. He would say “when I was a young child, he & his friends would drink in the evening and discuss the stock market. I would listen to them and one day I asked him why do these prices fluctuate. He told me to check if there is a news item in the newspaper”
Armed with a will to learn and fascinated by the subject, the young Jhunjhunwala – who was also professionally qualified as a chartered accountant – self-taught himself and took the plunge into the world of stock markets at the age of 25 with an investment of ₹5,000 when the Bombay Stock Exchange index of 1985 was at 150 points. His education was through trial-and-error with the cautious support of his family members. Rakesh Jhunjhunwala has always praised the support of his parents, wife and God in his development.
Rakesh Jhunjhunwala’s Investing Styles and Principles
Success is not final. Failure is not fatal. It is the courage to continue that counts.Sir Winston Churchill
Rakesh Jhunjhunwala has been given many names in the media and press – The Warren Buffett of India or the King of Bull Market or the Big Bull. While he is glorified and made the poster boy of stock market investing, to his credit Mr. Jhunjhunwala looks at himself as the “common sense investor”. He looks at a problem with a much simpler framework as compared to how we sense that stock researchers are looking into the problem.
Let me explain common sense in my own simple non-RJ viewpoint. I call it “galle mein kitna paisa hai” framework.
You are presented with a company which offers you ₹10 crores of profits per annum and it’s yours to buy for ₹100 crores. Would you go for it?
That’s a PE ratio of 10 or in my simpleton words – “you have to pay ₹10 now for ₹1 of earnings each year”.
Some may say yes, others no. But you will be interested if a better deal comes across.
Let’s offer that better deal now. You can buy this company for a discounted offer of ₹50 crores and the company will continue to offer you ₹10 crores in yearly profits.
A PE Ratio of 5 is certainly better than a PE Ratio of 10 which gives you a higher possibility to say “Yes!” now rather than ‘No’
Oh .. one additional thing. Since this is a textile company, the machinery needs to be upgraded every year at a cost of ₹10 crores but then that’s OK because you can claim depreciation of 10% on this which means your profit will be ₹9 crores per year which is still an awesome deal at a PE ratio of 5.55
But this is exactly where this deal does not pass my “galle mein kitna paisa hai” framework
Like any investor, I am investing hard money in this company so that the company can create money for me in the future. However if I were to do a simple cashflow, here’s what I see
Cash spent by me in Year 0 = ₹50 crores
Cash earned by company in Year 1 = ₹10 crores (profit without depreciation)
Cash spent by company in Year 1 = ₹10 crores (expenditure on machinery upgradation)
Cash earned by company in Year 2 = ₹10 crores (profit without depreciation)
Cash spent by company in Year 2 = ₹10 crores (expenditure on machinery upgradation)
… and so on
This means my galla will always have zero money in it and I will continue to have that debt of ₹50 crores because there is no money coming into the galla to reduce my initial outlay in year 0.
What a rotten deal! In true sense, this deal is aimed at taking my actual money and giving me fictitious profits.
And this, this deal would not have passed the “galle mein kitna paisa hai” rule
This is just one example. And a common-sense Rakesh Jhunjhunwala, over time, has created many such investing models which has helped him understand a number of companies in many industries for not just quantity of profits but also the quality of profits. He calls these “non-company factors”. In his words – “when you start, the quantum of profits is important, but then you realise that quality is more important”
A trained chartered accountant, Rakesh Jhunjhunwala had a strong bent of mind for data and analysis but when poised with the question on how much those play a role in him selecting the businesses he’d like to invest him, the investor responded – “For me, it is 40 percent data, 20 percent analysis, 40 percent instinct.” In my opinion, this is a brazen Jhunjhunwala are work here and on his part, he is quite meticulous in his understanding of key elements of any stock making decisions
Essential Metrics that Rakesh Jhunjhunwala looks for in any investment
- Competitive advantage
- Corporate Governance
- Return on Capital
Investing Principle 1 : Trade and Invest
There are often two types of players in the stock market – traders and investors. Traders operate on a short-term window (mostly within a day) where they often buy & sell or sell & buy stocks and other instruments for quick gains. On the other hand, investors are in for the longer term and often hold onto a stock for a considerable period of time which might be a few months or many years. They seek long-term capital appreciation through their investment and look at stocks as owning a piece of a quality business.
Rakesh Jhunjhunwala is in favour of being both – a trader and an investor. He often says that short term trading offers short term gain while long term investing gives long term capital formation. One way he puts it is – “trading is what gives you the capital to invest”
While his long term picks in companies like Titan Industries, CRISIL and Lupin are more known, the ace investor loves tactical positions in stocks using the trading route with the use of technical analysis.
Investing Principle 2 : Put Emotions into Everything except Stocks
Too often, we hold onto poor stocks because our emotions come in the way. “I bought it ₹100, how can I sell it at ₹45?” are some of the words that devils around your shoulder will whisper into your ears.
Rakesh Jhunjhunwala is clearly not a man who gets emotional bias come into the way of his investing style. This comes from a man who has held onto some investments for many years and even in times when there was hardly any movement in the performance of the stock price.
Lupin is one such example of a stock that hardly grew from 2003 (when Rakesh Jhunjhunwala first invested in that stock) till 2009. Infact, during these 6 years, the CAGR of the Lupin stock was just 9.7% per annum. And during this same period, the Sensex had moved from 3,000 levels to 17,000 points at a CAGR of 33.5%.
So why would he not divest from Lupin? Check out the detailed analysis of this & more insights on Rakesh Jhunjhunwala’s stock picking process in the 2nd part of this series.
Rakesh Jhunjhunwala is clearly someone who constantly reviews his investments and is not affected by a temporary loss in valuation. So when he invests, he has a clear entry value, a rationale on the assumption which allowed him to make that investment and a terminal value. When any of these moves, then he reviews his stock decision to know if his investment continues to be on the right track or not. If not, he often pares or sells his holdings in that stock which can happen if the PE ratio is stretched or the business has taken an unexpected negative direction or when he has a bigger, better opportunity.
Investing Principle 3 : Let the Cycle get Played Out
Millions of investors are guilty of pulling out just before receiving the rewards of a hockey stick that they dream of. This happens very often to investors who try to time the market and like to weave through the market like a boxer during his practice. We see this now with SIP (systematic investment plan) investments from millennials who show no patience and pull out their investments in a risky category like equities on the first sight of red i.e. negative returns.
Rakesh Jhunjhunwala is not a buy-and-hold-forever investor. Neither is he the investor who bobs-and-weaves or sells-on-first-signs-of-red investor. Rakesh Jhunjhunwala’s approach to stock market investing has been calculative and he has always had the patience to see the entire cycle getting played out.
Just like Lupin went through a phase where the stock price was not moving, Titan Industries too went through a phase of sharp downturn which could have challenged the resolve of any investor. Rakesh Jhunjhunwala bought into Titan Industries in 2002 & 2003 at an average acquisition price of around ₹5 and in a few years, the stock rose to ₹80 only to fall to ₹30. The ace investor did not sell his stake in Titan Industries as neither the earnings of the company neither the price-earning ratio (PE Ratio) of the stock had peaked – which means there was a lot of growth yet to come from Titan Industries. Rakesh Jhunjhunwala held on and Titan Industries rose & rose to become his darling investment. Titan Industries share prices are today valued at ₹1182 per share even after a 1:1 split in 2011.
Another reason why Rakesh Jhunjhunwala does not go shopping on whims or sudden movements due to the paucity of quality companies in the Indian stock market with the potential to be multi-bagger investments. While this is improving every year as more companies access the public markets for funds, quality companies with strong business models, competitive advantage, good management and reasonable valuations continue to be difficult to identify.
Investing Principle 4 : Think Macro
Rakesh Jhunjhunwala believes in India’s potential to be a multi-trillion dollar economy in the years to come with it’s thriving industries, hard-working population, natural resources, technological advancements and global strategic importance. He reckons Indians will be saving over a trillion dollars annually and atleast 10% of these will flow into the stock markets which will dwarf the current inflows.
The ability to position oneself for the long-term is a trait that Rakesh Jhunjhunwala prides himself on and always maintains a bullish stance. He says – “Ninety-eight per cent of the money made in the stock market is by being a bull. Not necessarily a big bull but being a bull”
We can see this in his three favourite investments and top holdings aswell i.e. Lupin, CRISIL and Titan Industries, all of which are linked to the fortunes of the Indian economies. He reckons as much as 70% of CRISIL’s business and 25% of Lupin’s is linked to how the Indian economy performs. Rakesh Jhunjhunwala is betting on the Indian growth story and is today one of it’s biggest advocates
Investing Principle 5 : Invest Only in What You Understand
Jack of all trades, master of none. Investing requires you to be a master in some industries or sectors with an adequate understanding of growth drivers, costs, competition, regulation and macroeconomic trends affecting the industry to make an educated decision on whether to invest or divest from your stock ownership in a company.
Rakesh Jhunjhunwala too understands that he cannot possibly master all businesses and for the investments he has made without enough knowledge, aptly labels those investments as his “investments out of informed ignorance”
He generally sees low to none exposure to real estate, technology and commodity stocks. Rakesh Jhunjhunwala categories these investments and sectors in the highly speculative bracket and finds price discovery to be very hard even for an ace investor like him.
Rakesh Jhunjhunwala’s Net Worth
As per Forbes.com, Rakesh Jhunjhunwala has a net worth of $2.6 billion or ₹18,200 crores as on 30th January 2020. This makes him the 48th richest Indian and the 804th richest person in the world.
Rakesh Jhunjhunwala’s net worth has grown over time as the Indian stock markets have been witnessing a bull run since 2014. Here is his wealth on an year-on-year basis:
- March 2010 : $1.0 billion (₹7,000 crores)
- March 2011 : $1.2 billion (₹8,400 crores)
- March 2012 : $1.1 billion (₹7,700 crores)
- March 2013 : $1.3 billion (₹9,100 crores)
- March 2014 : $1.2 billion (₹8,400 crores)
- March 2015 : $2.1 billion (₹14,700 crores)
- March 2016 : $1.8 billion (₹12,600 crores)
- March 2017 : $2.2 billion (₹15,400 crores)
- March 2018 : $3.0 billion (₹21,000 crores)
- March 2019 : $2.8 billion (₹19,600 crores)
- January 2020 : $2.6 billion (₹18,200 crores)
A large part of Rakesh Jhunjhunwala’s wealth comes from his holdings in Titan Industries. He recently upped his stake in the jewellery major to 6.69% in December 2019 which amounts to a holding worth a little of ₹7,000 crores (or $1 billion).
I hope you liked this article on Rakesh Jhunjhunwala, his life, learnings, investing strategy, his multibagger stocks and net worth. Don’t forget to read details about how Rakesh Jhunjhunwala selected individual multibagger stocks like Lupin, Titan etc. in part 2 of this article.