Bulls Interrupted is an effort to understand how top investors recalibrate portfolios and investing strategies when a bull market pauses. Because that’s what happened for several months this year. And while markets may have more recently resumed their upward climb, portfolios now face the problem of stark polarisation.
In short - when the going gets tough, what do these veterans do?
Here's the first chat in the series with value investor Raamdeo Agrawal.
Who: Raamdeo Agrawal
Known As: Value Investing Guru of India
What He does: Chairman at Motilal Oswal Financial Services
Key Wealth-Creating Ideas: Bharti Airtel (bought in 2004), Eicher Motors (bought in 2011)
Raamdeo’s Take
On Suspect Managements
“You know from the beginning that a bad management is slightly compromised, but it’s never slightly compromised. It will be completely compromised.”
On Disrupted Sectors
“Generally, in this kind of disruption, a new set of companies are the winners. But that disruption can be 15 years away, and the timelines are not yet known.”
On A Broader Market Recovery
“The bull and the bear markets aren’t permanent. Overdone moves on either side will get punished.”
Outlook And Preferred Sectors
Agrawal expects the next 20 years for India’s markets to be much better than the last 20. Therefore, a year of lower GDP growth will not matter too much, he said, adding that it may prove to be a good thing. That’s because it will make the government do things that it wouldn’t otherwise, he said, referring to reforms.
He cited consumption and quality financials among the themes to watch out for.
“All the economies which went from $3-6 trillion, their credit intensity was much higher than the first three trillion,” Agrawal said. “In India, what you needed in the first 70 years, you would need in the next few years. There will be a huge opportunity for great underwriters of credit.”
Here are the edited excerpts of BQ’s conversation with Raamdeo Agrawal:
When we look at the U.S. markets for example, they said it will be near 3,000 for now for a while now. Our markets, Nifty might be still at 11,500-11,600 or whatever level it is. It has been steady at this level and midcaps have gone down. How do you as a permabull realign your mental and your portfolio alignments in such a scenario?
One thing which I realised in 30-40 years of investing is that, nothing happens in a straight line. There are serious faults in this straight line. No bull market is permanently bull market, no bear market is permanently a bear market.
If you go through the last 25-30 years of annual data, you’ll realise that typically, Indian markets have done very good for five years and then, two years of disruption. It will always end up in a massive bull run, from 1985 to say, 1992 with Harshal Mehta bull run, it went from 300-400 metric index to 4,200. 10X in seven years and then it crashed to 2,500. Then, say in 2000, it again it went to 6,500-7,000. Again, it came down to 2,500. Then, in 2003, it moved from 3,000 to 21,000 and then again it crashed to 7,000 to 8,000. Then from 8,000, it went to 37,000-38,000- I don’t know what the number is. I have seen the index to be 79-89 when I bought my first stock. That is now 39,000, what is the index? 38,000. It has changed 380 times in front of time, but it hasn’t happened in a straight line. So, this is a fact of life that bulls can get disrupted over a time and even bears will be disrupted.
Bulls over a point of time if they overdo things and bears will get disrupted if they overdo the downside in a stock or in the market. This is a way of life. This is a natural phenomenon and it is very healthy if it happens. The reasons could be debatable, but it is very healthy that one type of market - because finally, the markets they end up overdoing something. We’d love to have that party on, but we realise in the end that when the party is going, we realise that it is not going to go on. But who wants to have the end of the party?
The reason why this becomes slightly more important Raamdeo. to my mind this time around is that, quite unlike the other corrections and we’ve seen similar phases happening in the past, the number of participants in the Indian equity markets are much higher, courtesy mutual funds and so. For a lot of people, they haven’t seen this one and half years or two years of pain at the broader end of the spectrum. The select stocks are available but individual stocks are bleeding. What should somebody who is bullish listening into you or somebody else who is bullish and believes that in 10 years’ time it will be higher but is currently seeing that there is pain in the portfolio. How does he align the mental thinking?
First is, you have to understand what you’re doing. You’re buying into the stocks; you’re risking your capital. You can actually lose the . You are not buying government treasury where pre day its about at 1 basis point or 2 basis point points. So, your buying equities, you’re buying pieces of the businesses. There is a risk in that. There’s no guarantee that a business would be successful.You are taking that risk and that too at a price, not just the risk, you are taking a price risk into that. So, clearly, it’s a risk allocation. You must see how much of appetite you have. Whether you understand equity, the very character of equity. It’s a very exponential instrument.
Downside is, one X; if you’re buying for Rs 100, you can lose only Rs 100. But upside could be, depending on what you’ve bought and what point of time that you’ve bought. It can be 2X, it can be 10X, it can be 1,000X it can be 10,000X. We have Infosys on one end. From the IPO date, it’s I think ten thousand times up - not percentage but times. HDFC bank is up maybe 400-500 times.
The whole of Wipro, TCS and you can keep doing the numbers. So, there are a few fantastic stories. There are a whole lot of companies which have gone to zero. So, you have to know this game that it’s not like buying gold that every which if you buy gold in NewYork, or Dubai, or in Mumbai, and it will have the same result. That doesn’t happen in stocks. In stocks, there are good stocks and there are bad stocks and time is a friend of only good stocks; the compounding works only in good stocks, de-compounding works only in bad stocks. You’ll definitely get your share of bad stocks, but it should be a little less. You cannot be a God; you cannot get 100 percent of good stocks. The Gods are the ones who are owning the good companies. They’re Gods because they have only one stock and fortunately, that stock is doing well.
But the problem this time around as I see is, the number of people who are owning bad performing stocks; not necessarily bad companies but bad performing stocks is just too widespread. Its not just a financial issue, its just a sanity issue. At some point of time you think that maybe whatever I am doing is wrong and the markets are not for me.
Next time around, we’ll be better off, we’ll learn.
How do you last?
This is how you learn. This is the way the market teaches you. We also started like this in 1995. For a Rs 10-crore portfolio, I had 225 companies. I couldn’t see from A to Z. That’s where Buffett saab’s first teaching comes in, have a focused portfolio. There was a Buffett portfolio - the book by Robert Hankstorm - that shows the way of how to manage portfolios. Since then, we never had 16-17 stocks in a portfolio. Even with a $2-billion, $3-billion portfolio we have 22, 23 or 24 stocks. That’s the way. I don’t remember what all companies I had. The year I had come down from 225 to 15 stocks, that very year my portfolio doubled. So, the guys who have lost out, they have entered say, two years ago. I think the guys who are suffering the most are the guys who entered two years ago. They are the best guys to feel the heat right now and they should not quit the market. They should not quit the market till the money delivers but their strategies must change. If they’ve got the wrong products, the wrong companies, I think they must change. I think this is the tuition they have to pay. I hope they’ve not put on too much of money.
I heard this in an interview on BloombergQuint that there are two approaches, your portfolio might have failed right now, and the idea is to make it super boring because there are two ways to invest. One is, fun and interesting- that is to do the here and now trade; the other one is investing which is do the boring thing but do it right. Would you tell yourself that try and make it as simple as possible in the current scenario when your portfolio is bleeding?
See, if your portfolio is bleeding, means you are under pain. So, how do you cut the pain and how do you reconcile with the pain? The pain is real, actually. Somebody has put in a crore and then that thing has become; Rs 50 lakhs or Rs 60 lakhs. So, he has to accept that this is a reality. Mark to market in a listed market, yesterday’s mark to market is a reality. Don’t even think about a crore, its gone, you’re worth 70 lakhs. So, first thing is that realisation. No one gets out of that to say that if I have given a cheque of Rs 1 crore, I am entitled to see my portfolio coming back to that. So, let’s get out of that. Now, you are worth 70 lakhs, what do I do? Realise what mistakes you have committed. If you don’t realise after losing Rs 30 lakhs, then you better quit the market and go to fixed income.
You have to rectify your mistakes. That is very important because it is a learning process and by chance if you have the best products and index has gone down by 25 percent and you have the best products, its fine, it will come back.
It is an important realisation, but it must be difficult to do that, right? You have put in say Rs 1 crore and if you feel that your Rs 1 crore if it was kept in a fixed deposit or a bank account, it could’ve become Rs 1.06 crore.
That’s the reality. Yes, investing in equity is risky. There is no guarantee and the risk will hit you. Whatever you do, however smart you are, it will find newer ways of catching you.
Has it done that to you in the last 18 years?
Always. This I am telling you from my own journey. I started in 1987. In 1990, we had about a crore. In 18 months, my Rs 1 crore become Rs 30 crore. It wasn’t even a crore, it was around Rs 15-20 lakh. A person who could barely go to a five-star hotel gets Rs 30 crores. It is easy. In 18 months, before I could realise anything. I didn’t have a house, I didn’t have a car. So, Rs 30 crore even today is a good number but back then, it was very high. It was equivalent to Rs 300 crore. Now, give that to a hostel student and it’s great. Then, it crashed from Rs 30 crore to Rs 10 crore. A lot of times, they’d ask me, how did you feel? Just as we didn’t realise it became Rs 30 crore, so we didn’t realise that it had crashed. But Rs 10 crore were a lot of money. There were 225 stocks, a Rs 10-crore portfolio, we were struggling so as to what to do. Then I had this reading habit, so I got this Buffett annual report. Somebody sent it to me and suggested it and we changed our style. We started following and we found a guru in him.
Does that change every time? I am just trying to wonder if indeed in these 18 months, the re-alignment of the portfolio as you would have done; you said that even you committed some mistakes in the last 18-24 months. Is the strategy of realignment different from every time the bull run gets interrupted?
One thing about the market is, it is an evolving machine. The way Amazon is d today, it was not d this way say 15 years ago like this.
But you keep on telling me that there are these three or four rules which are lifelong. Therefore, how do you do it?
Yesterday I was listening to one video. There he said, we look at moat, but we don’t look at in fact when the mote is very high and stable, we will sell. What is this we said. We want expanding moat and till it is expanding we will be there and after that, we will sell. Like this fund manager says who manages $40 billion in the U.S. says, that we have sold Facebook. Why? Because now Facebook has become very large and they’re a matured company. So, they’re doing very well, they’ll keep doing very well but he thinks that this is a peak and this peak will continue as a moat. So we have got out. But we have bought into Netflix and right now they have some 60 million customers and they are just going by 5-6 million by every quarter so, we want that. That’s a way of looking at it so what I am saying is that, we will also learn something from him. He is doing very well and everyone wants to be better but what he is saying is making sense. So, with our tricks of QGLP, it will refine and we will learn a little bit more. We will put more money where moat is expanding and we will put a little less money in where moat is expanded and is stable.
Your dear friend Mohnish Pabrai was with BloombergQuint the other day and he was giving a perspective from somebody sitting on outside saying that he was looking at India and other countries and he thought that 6 percent GDP growth on that base is nothing to sniff at looking at the options a global fund manager has. My question to you is may be at 6 percent right now, may be at 6-8 percent in next three-four years. you don’t know that. Would you believe that these interruptions that are coming in should be looked at constructively as opportunities to buy into because the India growth story is still alive and kicking?
See one of the things is that, I am not global. I am very India-focused. So, Mohnish and all they are dear friends, but they are very global. They sit in New York and you actually can scan where your money should go. You are comparing two different viewpoint, but let me tell about this GDP growth rate, 6 percent and all.
You must look at India, say 12 months is one thing but if you see a decade, what we have achieved in decade or what we have achieved in two decade from the turn of the century till date and tell me one economy which has achieved what it has achieved in terms of dollar GDP growth rate. You know what the dollar GDP growth rate for India 20 years compound rate is above nine percent. So, now my sense is the next 20 years will be far more exciting than this.
So, when you are a long term investor these 12 months don’t matter and so new government will come, new ministers will come, new economists, new governance will come so all these things will. It’s a passing phase. I mean, if eight comes to six, a lot of good things happens because governments typically, they do the right thing at the end.
I have complete faith that this government has the mandate and the power and the willingness to do everything under their capability to turn around this economy and take the economy not only from six to seven to right but they will definitely take it to nine and 10 because when you do the right things the potential of growing, we have added $2,000 per capita. When you grow at 6 percent you are barely adding $180-200 per capita per annum. When U.S. grows on $60,000 by 3 percent, they add $1,800 per capita per year. So, they are growing at 3 percent looks U.S. is growing at only 3 percent but boss you are adding $1,800 dollars per capita per annum at 3 percent, we are adding only… so, there growth per capita is 10 times faster than ours. So, I mean $2,000 is like nothing, global is $10,000 and we are the guys running Microsoft, we are the ones running Goggle, we are sending 100 satellites in one launch. I mean this country can achieve a lot more and competence is there, whether it will happen or not, a lot of things have to come together.
Growth is one thing, there is no theory of growth. The only theory is that it’s a lollapalooza effect, a lot of things have to come together external as well as internal more internally.
Are you looking at these last 18-20 months as an opportunity to buy or invest into some quality names which may have come up because of market effect? Or are you aligning yourself for that per capita growth and other newer sector coming in? What is it that you have done and what is it that you thought of doing it in last 18 months which was different than the other path, sector, theme whatever it may be?
It’s a continuous thing. We have committed some mistakes in last 18 months so that has to be rectified. That is the biggest agenda. You keep cleaning the portfolio. Don’t time the market, we don’t have any pain of say we manage about Rs 38,000-39,000 crore. We never had any cash, few hundred crores here and there, generally we don’t have any cash so there is no tension we have to get in and get out of the market. We are always in the market. For us it is parmabull.
To that extent, one headache is gone whether to buy in market or sell in market. Another thing, good or bad, is that there is no flow. So money is neither going out nor money is coming in. So we are managing same amount of money for last two, two and half years. That whole thing is very peaceful, so trading room is very peaceful. We don’t have too many trades. We commit mistakes, we sell that, or we find some better ideas. We are improving better ideas or the companies which are doing well can buy in some more because see, even with good companies you come to know as you buy. A lot of relationships and you understand how good is it because really good companies that you rely on as you stay with them because they are actually much better than what you thought it is. And bad companies, I am actually telling you they are so painful and they turn out to be far worse than what you ever thought. That’s been my experience despite my QGLP is in process. I don’t buy any bad quality companies purposely but in quality also there are shades. Sometimes you get carried away by terrific management or terrific business but compromise management. This is where the trap is, very good business and the management is compromised and you know right from the beginning that they are slightly compromised but actually it is never slightly it is all the way compromised and that’s where you finally meet the fate.
So, do you tell yourself after so many years that you have committed this mistake for example X and Y mistake. Have you strengthened your filters further? Have you done that and have you tried to reduce those mistakes?
Yes, of course.
In the current scenario, if you tighten up all your filters then what you want to buy in all those filters is just terrifically expensive. What do you do then?
Not necessary, as I said I am not getting any money and what I bought is doing fine and I don’t have cash, so I have to only improve in what I bought, what I have. I am looking into one idea which I think, I mean I read one book and in it, it gives me some theme and in that I can buy two ideas so it’s not only about valuation, its about what you have seen for five-10 years.
I will tell you right now the biggest pain is in financial sector, but biggest opportunity is also in financial sector.
Now you will say how? The two theories which are coming together one that as far as credit is concerned, as you go and see Bloomberg as you have all the data, you can do it in flash. All the economies which went from $3-6 trillion, their credit intensity in that next GDP is more than what it was for the first trillion dollars. So, right now we are at 60-65 percent, 70 percent of GDP as the credit. When it goes to next $3 trillion, you are lucky if you can do it 100 percent because it will be 110-120 percent of GDP, U.S. and all 250 percent of GDP.
So, clearly credit intensity is definitely going to increase you don’t know by 70-80 percent. So, you are going to need what you needed for 70 years, you are going to underwrite the same amount of credit in next seven years. Now tell me where is your credit writing attributions. So, the ones which are good and those which have energy to expand they will do extremely well. It will be a credit underwriters’ market and that’s why you see somebody sent me a table where I think 20-35 NBFC’s are there in that the market cap is same for last two years despite so much pain. All the losses of those 30 companies have gone to those five companies. So, the market is very smart. That gives me a sense of opportunity. Can I find a good underwriter? And right now this is exam going on whether you are good or bad. So I will pick up and buy tones of them. I need one or two ideas in a year, and this is also a story of migration, PSU banks leading to private sector. One is the credit growth itself is there and second from PSU to private within private from bad to good so what is left and within that I have to find.
Because you always say price is what you pay, is what you get.
But then perception of also goes up, what you are saying is going to happen. If you rely on that, there is a massive runway ahead, so you are willing to pay somewhat more.
There is this whole emergence of recognition of the non-lending financials now because the lending financials have these issues and we have seen all those spaces also do remarkably well. They are smaller compared to their global benchmark. Do you think sky is the runway there too?
Nothing goes to the sky but yes, I mean something goes 10X,20X. Opportunity is there whether the person or the owner or the management team will remain disciplined or not. It’s like getting a lot of good food. If you get a lot of good Rasgullas, and you eat two it’s good but then if you eat 20-30 then the same thing becomes your headache. India has a problem, I mean private entrepreneurs, they don’t know how to handle success. The biggest problem is how to handle success. Learn a lot from the West about how to handle success. Capital mis-allocation happens so bluntly. Once you are successful, that is one. Second their own behavior kind of getting away from the society, getting away from the reality. So, I think manifesting into bad capital allocation, that is the main problem.
Three slightly personal question, one is that you mentioned the assets and the management have remained steady and therefore there is no flow issues, but I am guessing you probably also have a personal portfolio which you manage in some fashion. Now there it would not be the same you want to find opportunities and in these last 18-20 months you thought of doing some changes. What has Raamdeo Agrawal, as an individual investor, told himself when he see his personal portfolio do whatever it has done, I don’t want to get into what it has done but what is it that you have learnt, what is it that you do right now out there because it will help a lot of our viewers.
One thing is that in 2014, I stopped buying diluted stocks in my portfolio because there were a lot of conflicts. I am chairman of the investing committee, we have a sale site. I appeared in CNBC, So there are a lot of conflicts, so we said let’s collapse, so we sold everything starting from Hero Honda to Nestle. Everything we sold and put in our own funds. So, 92-93 percent mine and Motilal ji’s all the money is in our own funds. I am not buying new stocks in my portfolio, but we are buying new stocks in the mutual fund.
I remember a conversation we had in your office when the listed stock of Motilal Oswal was trading at Rs 1,400-1,500 and you had said that there is some amount of exuberance out here without getting into whether it is right or wrong. But you have seen that ticker draw and it’s something akin to what a lot individuals might have felt and their portfolios have come up as well. What did you tell yourself when you see that price come off so dramatically?
First thing is price is not determined by me, we are only running the balance sheet. Price is completely beholders appreciation of what we are doing. Howsoever good an analyst I might be for other companies but for my own company I have given up. You have to figure out whether I should be price-to-book 1, book 2, book 3 because a lot of things are happening. We will tell you what is happening in the company but how you it looking at the future at these things there could be difference of opinion of about how I see future of all the businesses we have and how you see and the second is my exhibition capability. In India, opportunities are everywhere the issue is how you see our execution capability.
Assessing your own company’s worth is the toughest thing, I guess. When it is deeply underd, you know that this is the time to go and this is the time to buy everything and we bought back in 2008-2009, when the price went below book we bought it openly. I think we bought 8-9 percent of the company, that was one time. So, you know when it is fairly d and you also feel when it is excessively d at some point of time, which you are talking about. I don’t know the stock price. In fact, I know the stock price of my portfolio companies, but I don’t know my own company’s stock price because neither I have to buy or sell.
You are saying that has not impacted you at all?
Not at all. Neither it made me very happy also.
The cracks in the portfolio company, they impact you for a day or two? What do you tell yourself then?
I feel bad for the people who have come at the top. Two years back I just met a client, husband wife both have come but they got into my products two years back maybe that is breakeven or maybe a pain point because we keep telling them in five years you will double your money. If you see the last five years, people have doubled money but the point, he has come and three years have gone and he has not made 30-40 percent. So, this is part of its investor return and investment return gap.
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