Skill Sheet: What You Will Learn Here
- Understand strategies of Rakesh Jhunjhunwala, Prashant Jain, Sunil Singhania, Saurabh Mukherjea
- Know what differentiates them
- Incorporate their formula to identify winning companies into your own style
India boasts an army of the sharpest minds when it comes to trading in stock markets. Some of these minds trade on an independent basis, some trade for the organizations they have built on their own, while some manage funds for large financial institutions or mutual funds.
Here we will try to gain insights into the trading styles of some of India’s top fund managers. Please note that it is not based on any kind of ranking. These are some of the biggest names in the Indian financial markets common investors look up to them.
Rakesh Jhunjhunwala needs no introduction. He is famously known as the ‘Warren Buffet’ of India, thanks to his uncanny style of identifying the gems (stocks) from the stones. He holds these gems from a long-term perspective (during which time these gems get polished), and once their valuations become high and stock prices zoom, he may consider coming out of this investment and making loads of money. One of the biggest gems of his portfolio was Titan, in which he was an early investor and made a fortune of close to Rs 1,000 crore.
His trading style is based on 7 principles given below:
Company must possess competitive advantage - Invest in companies that hold an upper arm over their competition, and whose business model is hard to replicate.
Be ready to accept failure - We must be willing to accept defeat/mistakes and learn from them.
Be Patient – It is very important to be patient with the stock and not get carried away by the daily noise. If you have faith in the company’s business, then patience always pays off.
Always give 100 per cent to whatever you do – This applies not only to stock markets but to everything else in life. Being passionate about something enables you to win half the battle without fighting it.
If you have conviction, go all out to back it – If there is a right opportunity, one should go all out with the full force to take full advantage of that opportunity.
Trading and investing – According to this principle, Jhunjhunwala suggests that one should trade to generate short-term returns, and at the same time, one should invest his money to convert these short-term returns into long-term wealth.
Don’t regret the mistakes, learn from them – Rueing over the mistakes doesn’t help gain anything, it’s a waste of time. Learning from your mistakes can give you experience and wisdom to not repeat those mistakes again.
Prashant Jain, one of the longest-serving mutual fund managers in the industry, while making investments he doesn’t follow a specific investment strategy. He relies more on his gut feel or conviction about any specific sector or stock. He goes for businesses that have reasonable quality and management, tries to be reasonably diversified and holds on to his investments for the long term.
He evaluates the quality of a business by assessing its ability to survive for the next 10 years and the competitive advantage it will have over the competition. Return on Capital Employed (ROCE) is an effective tool to judge to quality of business because a company which does not have a competitive advantage will fail to deliver a consistently healthy ROCE.
Evaluating the management is quite subjective, but one can look at the track record of directors and auditors. The most tricky part is to assess the right valuation of the stock. He had once said in an interview, “Markets typically extrapolate the short-term growth rate to the long term. That is where markets get it wrong, at least over the short periods”.
Sunil Singhania is the founder of Abakkus Asset Managers, which manages more than Rs 2,200 crore in assets. His mantra for investing is that an investor must do what they understand and what they can sustain. So, they should be very clear both in terms of fundamentals as well as leverage, and as long as they are confident about the earnings growth of their investment companies, they need not worry about the corrections that the market undergoes from time to time.
He believes that unless one is quite experienced, it is better to avoid entering a momentum in the hope of riding the wave. Riding momentum can be risky as the investors might find it difficult how to react, and they end up making mistakes and incurring losses.
Deep corrections in the market should be used to enter new positions, as they can help you generate higher returns. He is of the opinion that being optimistic about the markets usually pays off well over a period of time.
Also, he takes a portfolio approach while investing and sees what the overall portfolio looks like rather than just looking at individual stocks, which might not present the bigger picture.
Volatility is always associated with the stock markets, and it is important for investors to bear/live with it.
Saurabh Mukherjea is the founder of Marcellus Investment Managers and one of the top fund managers in the Indian equity markets. He is known for his ‘coffee can’ style of investing, wherein you invest in a stock and then forget about it for the next decade. By that time, this investment would have become 10x the original investment based on the power of compounding.
The term 'coffee can' originated from the old method of saving that was used years/decades ago, where people would put their savings in an empty coffee can and forget about it for years together until they needed it for something very urgent.
Also, to identify quality small-cap stocks for investments, Mukherjea has a philosophy that a small-cap company is represented by its promotor/owner as they are usually family-owned companies involving a single promoter or a few family members of the promotor group.
He used a 4-point formula to identify the quality of small-cap stocks:
Shareholding – Promotor shareholding is a good technique to know about the company and how it is run. The greater the promotor's shareholding, the more the chances of the promotor's interest in the best interest of the company.
Remuneration – It is also a great yardstick to assess the promotors of the company. The greater the variable portion of the remuneration, the greater will be the motivation and incentive for him to grow and expand.
Dividends or reinvestments – Reinvesting the profits in the business is a good sign about the long-term thought process of the promoter as he seems to be thinking of growing the business and is not the one who is satisfied with the current size and does not want to make efforts to further grow his business.
Any other businesses – Any other business interests in other companies tend to eat away at the time a promotor can give to his listed entity and can skew its performance over a period of time.