SENSEX and NIFTY are near their life-time highs, however the retail investor’s interest in the market is completely lacking. The last 3-4 years have been excellent for those invested in stocks of high quality companies; however a large part of the investor community is nursing its wounds because of its love for gambling and speculative behavior.
We believe, while it’s important to gain insights from those who have been unsuccessful (you can avoid same mistakes), it’s is even more important to listen to those who have been successful and amassed enormous wealth from their investment in stocks.
In this article we would like to share with you a recent interview of Raamdeo Agrawal, Joint MD and Co-Founder or Motilal Oswal on CNBC-TV18s RD 360 in which he opines that buying right companies and holding them for years is the way to long term wealth creation in stock market.
You can read the entire interview in the excerpt produced below; the key highlights of the same are following:
- In 1987, SENSEX was at less than 500 and today it is 20,000 plus. The SENSEX itself has compounded at 16-17% and in terms of absolute numbers it is up roughly 40X. So, all those people who say buy today sell tomorrow may reconsider their decision.
- As per Mr. Agrawal, the tragedy today is that those who take delivery of stock for a week have started calling themselves as long term investors.
- While SENSEX is up 40X in last 25 years, individual stocks like Hero Honda, ITC, Bajaj Auto, Nestle are up 500-2500 times. These were the leading companies in their respective segments 15-25 years back and are leading companies even now. Those who sold these stocks at 10-20-100% gains left too much for others on the plate.
- There are three kinds of businesses – Great businesses, good businesses and bad businesses. Investors should stick to great businesses because such businesses have pricing power.
- Pricing power is important to combat inflation (an invisible tax). Inflation leads to cost escalation, and cost escalation can only be passed on to the buyers by companies with pricing power. Thus, pricing power helps the company retain margins on escalated costs and brings in higher profit.
- Investment in stocks isn’t rocket science and one doesn’t need a high flying degree to be successful at it. Success in stock markets has a lot to do with one’s mindset, application of common sense and control on emotions.
- Mr. Agrawal believes compounding opportunities will be bigger than what we have seen in last 25 years, provided one sticks to great businesses.
- Lastly, in our view, the most important comment of Mr. Agrawal that summed up the whole interview was “amateurs book profits and we book losses”. Yes, amateurs book 10-20-50% profits in ITC, Bajaj Auto, Nestle, Asian Paints, etc and miss out on 10-100X gains while sit over their losses in dud stocks like Unitech, Reliance Power, Reliance Communication. Great investors like Mr. Agrawal are quick to acknowledge their mistakes and exit from bad investments, even if they have to book loss.
Despite the fact that we have highlighted key points, we would suggest you to read his views in his own words.
Excerpt of the interview of Raamdeo Agrawal with Ramesh Damani on CNBC-TV18 is as below:
Damani: You started Motilal Oswal in which year?
Damani: Do you remember what the SENSEX was at that time?
Agrawal: I think less than 500.
Damani: Less than 500, it is now 20000. So, the Sensex itself has compounded at 16-17%. However in terms of absolute numbers it is up roughly 40X. So, all those people who say buy today sell tomorrow may see the point that even the Sensex has compounded or has gone up 40X?
Agrawal: Yes, but that is the tragedy right now. The holding period has come down so much; even a month is a very long period. People say that if they take delivery for a week they are long term investors. So, times have changed.
Damani: When the index itself goes up 40X individual stocks go up even more. The great winners in the Indian stock market, name a few?
Agrawal: Very recently I did this particular slide and I was stunned, I have still not recovered from that number, that ITC is the best performing stock on 25 year basis. That stock has compounded 35% over the last 25 years. Including dividend it is almost like 2500 times in as many years.
Damani: So, you are telling me someone in 1988 had the wisdom to put Rs 1 lakh into ITC, today it would be worth Rs 25 crore?
Agrawal: Yes. Including dividend it would be about Rs 25 crore otherwise it will be about Rs 22 crore. About 10-12 % has come by way of dividends. So, by dividend only that Rs 1 lakh would have become Rs 2.5 crore. So, total return is Rs 25 crore.
Damani: Infosys doesn’t meet 25 years because it was listed later. What was Infosys compounding rate?
Agrawal: Infosys got listed in 1993-1994. March 31, 1994, the market cap was Rs 218 crore and today it is Rs 212,000 crore. It has given Rs 16,000 crore dividend. It has done about 44% compounded total return.
Damani: There are so many examples even in my own life. I picked a stock called CMC which made the whole engine trading system for Bombay On-line Trading System (BOLT). It was Rs 20 stock and Rs 30 crore market capitalization. Today it is north of Rs 5000 crore market cap. So, it is over 100X in a period of 15 years. There are a lot of stocks that we find have given multi-bag returns and not in 5-times, 10-times but 50 times, 100 times and in ITCs case 2500 times your money right?
Agrawal: Yes. I have lived with Hero Honda which is the second-biggest wealth creator in 25-years. It has grown at the rate of about 32% compounded. Now 32 and 35 % in 25 years make huge difference, so, this is about 1200 times.
Damani: Warren Buffett once famously said his favorite holding period for a stock is forever. What does history teach us? Are there stocks that can be held for life? Is the past prologue for great companies?
Agrawal: In 2007, when I read Warren Buffett’s report he clearly laid out there are three types of businesses – great business, good business and bad business. He has compared these three with a bank account. Great business is a business where if you put money at 20%, next year it will give 25%, then 30, then 40, then 50, then 60 and then maybe 100-120%, like Nestle. Nestle in 2000 was earning about 25-30%. A year before it peaked out at 135% ROE on a larger capital base. So that is great business but they are very few. So that is a segment where you have to be.
Damani: Typically with great business, it must have pricing power.
Agrawal: It must have.
Damani: What is the importance of pricing power and why is it that important?
Agrawal: What is the investor’s biggest enemy; inflation. Inflation leads to cost escalation, and cost escalation you can pass on to the buyers of your products and services only if you have the bargaining power. Bargaining power is your capability of passing on the cost, and on top of it making the same margin on escalated costs itself. So, actually inflation comes to your rescue to give a higher growth in the profits.
Damani: Businesses that have pricing power are very rare. So you have to look for businesses that are natural monopolies or duopolies because they would have pricing power, example credit cards – Visa and MasterCard. Give me some examples of natural monopolies or duopolies in India?
Agrawal: Natural monopoly is of course the tobacco company that is ITC. Government keeps hitting them every other year by steep increase in the excise. They just pass it on and they make money on that as well. Their EBITDA margin on expanded price is not lower. It means they not only pass on the price increase but the mark-up also. They mark-up the inflation and then pass on. That is the ultimate pricing power.
If you look at companies like Asian Paints, they are not monopoly, but oligopoly. The industry structure is very good. If you look at the two wheelers there are 3-4 players. They do not have pricing power but they can pass on cost.
Damani: What has happened? Is the past prologue? What are the great stocks that you would look at this point? What are the great themes India globally where you would find these kinds of compounding opportunities?
Agrawal: Compounding opportunities will be bigger than what we have seen in last 25 years.
Damani: So opportunity size is greater.
Agrawal: What we saw in Infosys? 44% compounded for 20 years. You are talking about 32,000 times, if it is 25 years my sense is that it will be 10x of ITC. That is the difference between 44 and 35. We do not have to worry about what we do not have. We have to worry about what we have and we have enough of it. There are two categories. One is the existing blue chips and running businesses. Can they become dominant in India and go global? I think this category is going to become every large, like Hero. Hero is the second best company today. They have broken up with Honda. Now their opportunities are not only dominant in India, but explore the global markets.
Damani: So the past will be prologue. They will continue to do well you say.
Damani: How about the logistics sector? I am bullish on that, because of the e-commerce boom.
Agrawal: Yes, e-commerce boom. All the packages have to go from Kashmir to Kanyakumari and vice-versa and billions of packages.
Damani: If you are advising someone who is 25 years old, your theme would be to still look at consumer prices because that is the easy picking.
Agrawal: I would go like this. First I would look at profit pool. What is profit pool? Whether that business has profit here in India, if it’s a completely new business, anywhere in the world that particular business makes money or not and over the last 10 years how that pool has moved. In 1998, total IT industry was making hardly Rs 500-600 crore total, today 100 times, the profit pool has moved. From nothing to 10% of the total corporate profits in India is made by tech and my sense is that tech will become much bigger than what we have seen so far.
Damani: So you can catch them young, you can catch them mature, but the trick is to buy great stocks, buy great businesses and hold them.
Damani: How does an investor discipline himself to become a great investor? How does he sit tight? Markets fall every three weeks. Your profits are eroded in front of your eyes. How did you train yourself and how do we train ourselves?
Agrawal: I think that is a big challenge. Investment returns do not translate into investor’s returns. So, the question is how we align these two and that is where the behavioral aspect of investors comes in. Probably they put in more money than what they can be comfortable with, because investing is about very benign neglect types. You bought it and you do not bother every day about it.
Damani: You do not need a Ph.D, you do not need a degree in rocket science to be a good investor, right?
Agrawal: Yes. Second thing is most of the people want to do it themselves. The problem is amateurs book profits and we book losses.