BQ Edge | Vijay Kedia’s Secret To Creating Wealth By Trading
For a retail investor, trading is akin to gambling.
That’s what veteran investor-trader Vijay Kedia cautions, saying that trading requires a completely different mindset. The parameters and principles are starkly different from investing, and people are not able to differentiate between the two, he said.
An investor should be ready to lose everything earned over two years in a single trade, according to Kedia—he was speaking at the Delhi edition of BQ Edge, BloombergQuint’s on-ground initiative. “Unless an investor has that mindset, it’s better to not trade.”
Kedia said he realised early that to create wealth through trading is extremely difficult. “Never look at legends like Rakesh Jhunjhunwala and Radhakishan Damani, because it will be very difficult for a normal investor to imitate their mindset.”
Still, Kedia believes that it’s important to be ruthless with money to earn money through trading. “If one is not ready to lose whatever one has, he/she won’t be able to make wealth via trading.”
Kedia said his success stems from one simple act: whatever money he had, he invested in the markets. In the last 30-40 years, he has not had a single day where he is not fully invested in the market. And he made large, concentrated bets.
Kedia's investments in three stocks returned 100-fold gains. But how easy is it to stay invested when stocks have gone up five to six times? Kedia said having a big vision enables an investor to compound wealth.
Kedia secret for creating wealth:
- Buy when no one else wants to buy.
- Take concentrated bets.
- Dream big and stay invested when the going is good.
Besides, the other important attribute for creating wealth is patience. He cited the example of a Chinese bamboo tree, which doesn’t grow for three to four years after sowing the seed. But when it starts growing, it shoots up to 80 feet in six weeks.
If an investor is convinced about a company, Kedia said, time correction in a stock price should not deter investors.
Watch the full discussion here:
Read the edited transcript here:
You are a quintessential rags to riches story. You may have started at zero, negative or first large investment at Rs 35,000 to being the second-largest shareholder in 10 listed companies. Lots of people would want to know how you did it, as everybody aspires to do it?
Being the largest shareholder after the promoter is not a big thing here in India. For individual investors, even if you buy 1 percent of company, your name is there in the shareholding list. If you had 2-3 percent, you can be largest shareholder technically. So that is not a big deal.
How does somebody who started off with negative cash in his pockets 30 years ago, reach the stage? How did he go about investing in his trading career? How did he choose the companies to have the wealth to be second largest shareholder?
If we put life in three quarters, then the first quarter was all about learning. I started with trading because trading is the only business where you don’t need any intelligence, capital and information. It is like gambling.
What is the difference between high-risk and high-gain business and gambling? Like when you are in gambling, you don’t have strategy and fundamental backing and no strategy for risk. When you are crossing road without looking at signal then it is like gambling. Also, if you are looking at signal but the vehicle driver is not paying attention to signal and hit you then that is gambling too. So, my first quarter started with trading.
After 10 years, I thought I can’t sustain in this business. Don’t look at Rakesh Jhunjhunwala or Radhakishan [Damani] and enter in trading business because it is not that easy as they perceived it to be. They are legends. Certainly, it is a difficult game. Most important is your mindset. If you have affection for your money, then you can’t trade. You need to be ruthless with your money.
So, 10 years had gone by on trying and making errors in this business and improving myself. But I couldn’t save money. I would make money and lose money at the same time.
After 10 years, I realised this is not what I want to be. I am still a work in progress. I changed my track and at that time I had Rs 35,000 and I started putting that money into investments. By the grace of God, the investment cycle at that time was good.
If you started at Rs 35,000 and you were to grow nominally at 30-35 percent then you would not become second-largest shareholder in 10 companies. Surely, you did something different.
I didn’t do any different. Whatever money I had at that point of time, I put that into stocks. There was no time in my last 30-35 years of career when I was not fully invested. Maybe even 105 percent invested. If I was doing some future trading, then i was borrowing to do it. I did concentrated bets. So, the 50-100 stocks which I bought, there where 30 stocks which grew 100 times. When I bought the shares, I din’t know that they will become 100-baggers.
How was the journey? What do you do to convince yourself that ‘let me stay invested’? Do you have access to management? Do you read annual reports?
I will give you an example through Mumbai locals. Say you want to take a journey from Churchgate to Borivali which takes 45 mins. Between one station to the other it takes 15 mins. If that 15 minutes journey between stations takes you only 5 minutes, you wouldn’t not want to get off that train.
My vision was big. Suppose I invested Rs 10 lakh and it is giving me return of Rs 50 lakh, then I think what I will get with this mere amount? Your vision has to be so big that you even doubt yourself, and then only you can make it big. You have to be greedy. Michael Douglas has said that ‘greed is good’. If the vision is in sight then you have to increase the target.
You bought into two companies. Those companies went up five to six times and then the company did something which made you believe that you can increase money from here. Did you invest more money at that stage? How have you done it?
I will tell you about three stocks which went up by 100 times in 10-15 years and I bought those shares in 2003-06. So, luckily that was the time when market actually turned around. The new bull market started after 2003. I was lucky I was in that market and that I had capital.
There is typical pattern in these shares. When I bought these shares, nobody was willing to buy these shares. All these three to four stocks went up by three to four times by 2008. When financial crises happened in 2008, all those shares were fallen down by 75-90 percent. That means I was back to my cost of purchase.
Whatever wealth I was having at that time, it never clouded my mind. I always wanted money just to sustain my family. If I had Rs 1 crore, ultimately, I was about to invest that money in the stock market itself. So, what is the point in selling those shares? In 2008, my money was back to my cost price. That profit which I was making at that point never came to my mind. The money which is on the table is not your money but of the market. Until and unless you sell your stock, money belongs to market. I don’t believe that this money is mine unless and until I purchase something else from it. If you calculate money on daily basis then you cannot make big money. Suppose your Rs 50 lakh came to Rs 30 lakh and the moment it goes back to Rs 50 lakh, then you will sell your shares. If you see the pattern in the stock market movement, this reflects in it. Suppose a stock price from Rs 20 goes to Rs 50, again falls back to Rs 30, it comes back to Rs 50 then it takes time to cross Rs 50.
To create big money in market, you have to have that mindset that this money doesn’t belong to me and you have to keep a high target. First you have to ask yourself why you are here in this market. I don’t think that it is possible to make 20 percent compounding happen when you aim for it. Suppose you bought stocks and it is not moving for three years and in the next six months it doubles, then on an average you could say that there was a 20-25 percent return. But it is impossible, unless you are a short-term trader, to create such percentages of return.
Because of not having a formal education, has your investing style changed from what it was and what it is now? Now, everybody does Discounted Cash Flows. Have you resorted to do all of those things to make big investments, or is it still a lot of common-sense investing when you choose stocks?
It is not necessary to be an MBA to make money in the stock market. You don’t need a degree to be successful in the stock market. You need education of the stock market. Not necessarily, all Chartered accountants could be Rakesh Jhunjhunwala. There is a different study of stock market. What is the qualification of Radhakrishnan? But he is the biggest investor, trader and entrepreneur because their senses have worked out for them. If you want to be successful in any work, you need to be passionate. Passion is more important. You don’t have a Plan B.
How does it work now?
I have two analysts but I do it myself. They help me in data collection. They do the back-end office work, related to research.
You made an important point of trading versus investing and how you thought trading for large community of people who are looking to make big wealth is cancerous?
Trading is a different ball game. Suppose you are a good swimmer, but does it mean that you could be a good diver? But for being a diver, you need to be a swimmer. Every swimmer cannot be a driver. Every CA cannot become Rakesh Jhunjhunwala.
Trading is a fast game and the principles and parameters of trading are different from investing. People can’t discriminate between the two. If you do anything without a plan, strategy and risk assessment then it is gambling and trading also. You need to be aware that the money you have gained in two years, you can lose it in one day.
If one doesn’t know his or her mindset, a better option is investing?
Yes, start with investing. Or, mentally you should be prepared to lose whatever you have in your pocket. So, risk taking capacity is important. Before understanding the market, one should understand their own mindset. If your lifestyle is changing because of trading, then it is cancerous. Gambling is a sacred game. If you are in a trading business and are mentally disturbed and it is affecting your lifestyle in a negative way, then what is the point in doing this business? Trader is like a magician. Investing is only business where you can build a castle without brakes. You don’t have anything, and you still can be in the stock market. You just have to follow the rules.
You had given an example of a Chinese bamboo in one of your Tedx talks. Can you dwell on it?
When you sow the seeds of a Chinese bamboo tree, for at least 4 to 5 years it does not reap shoot. You get frustrated. The same thing happens in market. It is not necessary that you buy the shares and it will start moving from tomorrow. It might take three months or three years to move. So, after four years you will see a green shoot and have hope. Within six weeks, that tiny plant becomes 80 feet bamboo tree. In thelast 4.5 years, the shoot has not grown and within six weeks it grew to 80 feet and then it continues to survive for 70-80 years. So from last 4.5 years, it was growing underground and creating a foundation for itself to sustain the load of 80 feet for 70-80 years.
This is what investing is all about. You need to keep that kind of passion and patience. Conviction is more important here. You need to research that your formula and fundamentals are right and then you have to keep patience. You need three things in the share market – knowledge, courage and patience. Knowledge to identify good stocks, courage to buy big and patience to hold. If you do these three things rightly, then it is easy to create wealth.
In Rs 1 crore portfolio, how many minimum and maximum stocks one should have?
It depends on you. I usually tell people not to have more than 10 stocks. Suppose you have Rs 100 and you buy 100 shares, then that means you have invested Re 1 in all the shares. Out of those 100 companies, not all companies will become multi-bagger. There could be 2-4 companies which will give you 5-20 times return. All others can’t be multi-bagger. Suppose you have invested Re 1 and that becomes Rs 5 and all other Rs 99 is like Rs 100-150, so it will not have any meaningful impact on your portfolio.
If we want to buy 100 shares, then we buy it anyways on anyone’s comment. If you say that Rs 10 is very important for me and I cannot lose that money in market, then you will do research and invest your money wisely. If we do concentrated bets, then you will research it well and watch it thoroughly because you will feel bad losing that money. It is better to have two children and concentrate on them rather than having 10 children.
You need to generally have 10 shares. But if you are just starting your career in the stock market, then it is not necessary for you to stick to 10 shares. You can have more. The idea is to gain confidence while investing. You can take more initially to train yourself. If you want to make big money in the share market, take inspiration from the life of Rakesh (Jhunjhunwala) or other big investors, there are only 3-4 stocks which have done wonders for them. The idea is where to strike that masterstroke.
The share market business is a full time job. It is okay for investing, but you can’t do it part time to create big wealth. If you want a percentage return, then even mutual fund gives it to you.
How do you assess promoter, sector and business quality?
You should do that work in life which you are able to understand. It is not the work of trial and error as money is involved in it and it matters. Other than 500 shares, all are not profitable.
Promoter’s quality can be judged by their biggest track record and how this company has performed in the last 20-30 years. I don’t invest in any company which is 5 years old. It should be at least 15 years old. The reason behind this is that this universe is working on a cycle. My idea is if the company is 15 years old then it must have seen many cycles in its life. The more the cycles and experience, the more they learn. If inspite of recession and slowdown, the company is sustainable and the company has ultimately grown in last 15 years, so you know the quality of the management. The company had that caliber to sustain in those difficult periods. If the company has seen the bull market of 2000 and 2005, then that company must have management capability to take risk. The same theory is applicable with the management too. The older the management, better the experience. Whatever they have predicted in the past, have they fulfilled or not? If the company has not done this, then the management is not focused. If management will earn profits, then you will earn returns as you are investing in their stocks. If you don’t understand the company, then don’t invest in that company.
For sector wise knowledge, you need to learn. My analysts send me information. You need to study what is happening in India and the world. Stock market gets impacted by internal and external factors. For internal factors, you can read the balance sheet of the companies, know the management. You can understand what is happening in India. But you can’t gauge external factors like drought in some country or if some country has levied more import duty or there is something related to forex which led to a problem in your company. These are external factors and you can’t learn them. You can take care of yourself internally and be fit but that doesn’t mean you can’t die due to external factors.
I didn’t invest in IPOs and that doesn’t mean it is wrong to invest in IPO. It doesn’t suit my mentality. I didn’t personally invest in IPO as I didn’t get much shares and I like to do concentrated bets which is not possible in IPO.
When are we going to see the next bull market, and which will be those sectors?
I think, after 2003 there was no bear market. Forget about technicalities which says if Sensex falls by 20 percent then it becomes bear market. Suppose between 2003 and 2008, 10 sectors have performed well like metal, PSUs, engineering and other sectors. Hindustan Unilever, which is an FMCG, has not performed and also pharma has no tperformed well. After 2008 financial crises, there were five sectors which grew by 50-100 times in between 2008 and 2016. Pharma increased by 20-40 times, FMCG has grown. HUL has not performed for 10 years and so does FMCG. And then Coalgate and HUL were of Rs 125, which is now Rs 1700-Rs 1800.
I made money in 2009-2016. It is not necessary that from 2008 to 2016 people have made money in the stock market. If you bought the shares in 2003-2008, which didn’t perform well then it was not bull market for you. If you sold those shares in 2008 thinking it has not performed from the last few years, then that’s the biggest mistake. You need to keep your vision big. There is sector rotation in the market, and you need to watch it. I think we are in the bull market and we never were in the bear market.
What are the three key data points you look at for a particular company?
Growth is important and if that sector is growing or not. I will need to see if the sector and the company will sustain growth for the next 10 years. Also, the management has to be honest, hungry and smart. You need to see their previous track record, hunger for growth and their smartness to get rid of the hurdles.
When do you exit a stock?
When the management changes its focus. Suppose there is a company who make water bottles. One day they say it will enter into milk business. Then you need to understand if that management is capable of running milk business or not. If they are in the same line as doing backward or forward integration, then that’s okay. But if the diversification is forceful then their focus has changed. Sometimes valuations don’t match the growth of the company. Suppose a company is growing at 10 percent and the PE ratio is 40-45, it is okay for one-two years. But if that market is not growing then how will the company grow. When valuation is high, you can exit.Also, exit when you see other opportunities. But you need that sharpness which you’ll get through experience.
In 2008, when the crash came, you lost almost 90 percent of value in those companies. Did you increase your holding or took new positions in new companies?
I exited Aegis Logistics. The other company was CERA Sanitaryware, but it was near my cost price. It went up by 4 times and then came down by 75 percent. I bought another share called Atul Auto. It depends on if [whether] you are mentally prepared to buy those shares. The stock market is a risky game. It is a platform to make the easiest money in the hardest way.
How can an investor distinguish right and wrong information?
By experiencing loss. If you don’t understand the information, then leave it because the stock market is an ocean of opportunities. Some go fishing, some explore. If you need to swim, then you need to have only information. If you want to go for exploration, then you need risk appetite, technology, and capital. You need to decide what you want to do in the stock market. If there is confusion that you can’t do that work, then don’t do it. You need to be selective and learn about what you are focused on.
How will the transition occur from trader to investor? Are there certain parameters where you will realise this is the time I have to get out as a trader to be an investor?
I am not saying you should quit trading. Trading presents new situations in front of you. If you feel you are a good trader and you are making money, then you should continue trading. Hardly one percent of the people are successful in trading. If you don’t have an appetite to lose money, then you should not go in for trading. If you can’t manage stress, then you can’t be in the stock market. Everyone should learn to manage stress. Money management can be done by others, but stress management must be done by you. That transition is your call. It depends on your confidence. I started with 500 shares at the beginning. The moment I made money out of those 500 shares I started trading in 5,000 shares. And then I started trading with 50,000 quantity. If you get the share of your money and invest for the long term, then that is investing. So, trading and invest can go parallely. Don’t use invested money for trading, as that will create a problem for you. Trading and investment, both are different games. If you can recognise the difference, then you can be successful.
Which sector will do well?
Sectors keep on changing. This is my opinion and I can be wrong. I think bank shares have a new move. But there are problems in PSUs. So, the banking sector looks safe. Private banks are safer because they have not fallen as compared to other public sector banks.