Warrens –the epitome of success

Warren Buffett of United States is known as the Oracle of Omaha. He is the most successful investor of all time. His contemporary Rakesh Jhunjhunwala, referred to by various labels as the Oracle of Mumbai, the Badsha of investments, and the Guru Investor of the Indian stock market is generally called India’s Warren Buffett. He, like Warren, has also become an exceptionally successful investor through his creative thinking. Though the two belong to different countries and their philosophies at times differ a bit, they have a lot in common and somehow their picks tilt the scales in favor and make them perfect bullish punters. See, how these two investors are similar, yet different. Warren Buffet’s investment approach is a blend of Ben Graham and Philip Fisher’s style of investment. Graham believes in the margin of safety approach, which uses strict quantitative guidelines to buy shares in companies that are selling for less than their net working capital. Graham also emphasises that following the short-term fluctuations of the stock market is pointless, and that stock positions should be considered on long-term basis. To this, Buffet adds Fisher’s idea of appreciation for the effect that management can have on the value of any business, and that diversification increases rather than reduces risk as it becomes impossible to closely watch all the eggs in too many different baskets.

Jhunjhunwala’s stock picking strategy is influenced by George Soros trading strategies and Marc Faber’s analysis of economic history. He supports the rule, “the trend is your friend.” His investment philosophy says “Buy right and hold tight.” According to him, markets are temples of capitalism and are the ultimate arbiters. During Harshad Mehta days, he admits to having been a bear and believes that investors should be like chameleons.

He doesn’t like to be called himself as India’s Warren Buffett because according to him Buffet is far ahead of him in riches, success and financial acumen. However, in spite of Jhunjhunwala’s being modest, his fortune is still significant in a poor country like India where average annual income is measured in just hundreds of dollars. He, no doubt, has carved a niche for himself in the world of investment markets for he is consistently tracked by many people all over the world.

Warren cuts down his investment ideas into simple, memorable parts. He remains informed, does his homework and invests only in companies he thoroughly researches and understands. He believes the most important quality for an investor is temperament, not intellect. A successful investor doesn’t focus on being with or against the crowd. The stock market may swing up or down but he remains focused on his goals. Jhunjhunwala too like Warren tries to avoid complex economic issues and hard business problems. He likes to invest in simple, understandable businesses. He refused to buy Himachal Futuristic, Global Tele and Pentasoft in their heydays. He instead chose to stick to Shipping Corporation, Titan Watches and the other tried and tested names. This echoes a well-known investment tip: Buy what you know.

He claims to base his trades, in part, on the business model of a company, its growth potential, and its potential for longevity. He factors in heavily the competitive ability, scalability and management quality of the enterprise. The entrepreneur, according to Jhunjhunwala, makes an invaluable difference to his expected investment returns. According to him believing in the vision and the beliefs of the entrepreneur and evaluating risks that may not be perceived by the entrepreneur are key success factors for a trader.

Like Warren, Jhunjhunwala also does meticulous planning and follows it up with an eagle eye for noticing details. Though he does basic research, he listens to other investor’s views with great attention. He goes through the quarterly financial statements in minute details and keeps in mind the collateral developments that can affect the fortunes of the stock. In financial forums, he asks pertinent and searching questions exhibiting the element of a visionary who hardly misses any point of importance. In Aurobindo Pharma case he grilled the management with some hard questions and later it was found out that he had bought it. The stock price then was at Rs. 170.

Today, the stock price is at Rs. 1,086, reflecting a gain of 551 percent. Tata Motors is another example where the ET in Feb 2013 noted that Jhunjhunwala was taking deep interest in the company and wondered whether India’s Warren Buffett, saw a Burlington Santa Fe in Tata Motors? Since then the stock has gone up by 75 percent. Jhunjhunwala like Warren also does good homework of deeply analyzing a business before buying it and patiently waits for his investments to mature and reward him. For example, when he bought Lupin, it was just another mid-cap pharma company starting out into the world of generic drugs. What he saw was a good, efficient management that knew its job, a debt-free status, a good product line up and a growing market.

When the market matured, Jhunjhunwala raked in millions. His another investment was in Karur Vysya Bank which he has held onto even after about 22 years of buying and his paltry investment of Rs 2,000 is now worth 200 crores by virtue of patience and conviction. Jhunjhunwala advises that if the market behaves irrationally and punishes a stock for shortterm issues, that’s the time for you to jump in. He cites the classic example of Titan Watches to prove his theory. Titan suffered a headline crisis when it went into Europe and lost a lot of money. Jhunjhunwala wasn’t alarmed because he knew that India’s prosperity and the domestic buyers were more important. He saw the future and knew subconsciously that Indians were going to buy far more watches and that the underlying business remained sound. “In a moment of crisis you can get cheap valuations, and if you can see the future where the product could have demand and growth, you should use the opportunity to buy.”

According to Buffett if the business does well, the stock eventually follows. He invests in stock in a way that it equates to owning a piece of business. So when he searches for a stock to invest in, he seeks out businesses that exhibit favorable long-term prospects. He examines whether the company has a consistent operating history, a dominant business franchise and has the ability to generate high and sustainable profit margins.

Along with these features if the company’s share price is still trading below expectations for its future growth, then it’s a stock Buffett would like to own. Buffett never buys anything unless he has good reason for paying a specific price per share for a particular company. To pick stocks well, says Buffett, the investors must set down criteria for uncovering good businesses, and stick to their regulating principles.

They might, for example, seek companies that offer a durable product or service and also have solid operating earnings and the prospects for future profits. The shareholders might establish a minimum market capitalization they can accept, and a maximum P/E ratio or debt level. He emphasizes on finding the right company at the right price with a margin for safety against unknown market risk should be the ultimate goal. The point not to be missed is that the price investors pay for a stock isn’t the same as the value they get.
Successful investors always bear this difference in mind. Buffett is a value investor who likes to buy quality stocks at rock-bottom prices. His real goal is to build more and more operating power for Berkshire stocks like Himachal Futuristic, Global Tele, Pentasoft while he bought Shipping Corporation and Bharat Electronics because he saw long-term value in them. People still need shipping and electronics. He is of the view that investors should never get carried away by aberrations. They should, on the other hand, recognize and respect them as the market corrects its aberrations though it takes time. He looks at sources that can yield profits immediately or in the long run. He gives the example of Infosys and Wipro. While the average investor would have analyzed PE & ROE and other drivels of these companies, an incisive investor in the 1990s would have realized that an internet revolution was coming in the next couple of years; the off-shore business segment was booming and would have loaded up on these shares. Likewise when Praj Industries started out manufacturing bio-ethanol fuel, nobody realized the massive demand that would arise for alternate fuels like ethanol. Foreseeing future demands and big trends is the key to finding ten-baggers.

Jhunjhunwala enjoys the distinction of an impetuous selfmade man who built his fortune from an early bet on Tata Tea by buying its 5,000 shares as risk taking investor. He was confident that the markets had under-estimated the potential of a company looking to grow at a time of rising yield production. He trebled his money within months. Better, bigger investments followed, including a leveraged bet in the late 1980s on iron ore exporter Sesa Goa. He bought the stock at 60-65 rupees each and sold at 2,200 rupees. So unlike Buffett, Jhunjhunwala is a votary of leverage, a risk taker, doesn’t do deep analysis and applies common sense. He admits that at times he invests on impulse first, and scrutinizes later. Anyhow, he basically keeps himself focused upon being a long-term investor. He remains an active trader just for the sake of keeping intact his own market habits and practices since he believes that active trading keeps him alert as his initial capital base was the result of active trading only.

Both Buffett and Jhunjhunwala are for the power of conviction: “If you see an opportunity, grab it today!” Buy with conviction. The best opportunities often look like insolvable problems and hard work. Many wonderful opportunities are lost due to hesitation, procrastination and “thumb-sucking,” as Warren Buffett calls them.

Many investors end up with life-long regrets that they saw opportunities slip away right under their own eyes. It is important to identify the opportunity. But that’s not enough. You have to be able to articulate the simple but powerful logic that most people miss. And above all, you have to be decisive. Value investors often get stuck in a trap where they are perpetually seeking extra information to validate their idea, while others wait and wait again for lower prices. In this, Jhunjhunwala echos Warren Buffett and John Maynard Keynes: If it’s cheap, buy it.

Don’t pass up something cheap today in the hope that it will get cheaper tomorrow. Jhunjhunwala, also sees virtue in Buffett’s idea of value-investing: “Value investing is also buying a stock, keeping it for 12-18 months and selling it at a handsome rate. Value investing is buying value which may not always be a lasting one. That value could be encashed over two or three years.” Jhunjhunwala looks for scalability of operations. He likes to buy small caps that could quickly scale into large caps but doesn’t worry about caps being large, mid or small whatever fetches value is fine and he goes for it.

Undoubtedly, investing and trading is a dynamic field and requires smart revision and adjustments in approach to grab opportunities. Both Warren and Jhunjhunwala, as shrewd investors, recognize this phenomenon well. It is apparently for this reason that they have departed from each other in certain ways. While Warren Buffett talks about people he admires and trusts, Jhunjhunwala likes to use the word “entrepreneur” to describe what makes an invaluable difference to his investment success. According to him bel ieving in the vision and the beliefs of the entrepreneur and evaluating the risks that may not be perceived by the entrepreneur today!” Buy with conviction. The best opportunities often look like insolvable problems and hard work. Many wonderful opportunities are lost due to hesitation, procrastination and “thumb-sucking,” as Warren Buffett calls them. Many investors end up with life-long regrets that they saw opportunities slip away right under their own eyes.

It is important to identify the opportunity. But that’s not enough. You have to be able to articulate the simple but powerful logic that most people miss. And above all, you have to be decisive. Value investors often get stuck in a trap where they are perpetually seeking extra information to validate their idea, while others wait and wait again for lower prices. In this, Jhunjhunwala echos Warren Buffett and John Maynard Keynes: If it’s cheap, buy it. Don’t pass up something cheap today in the hope that it will get cheaper tomorrow.

Jhunjhunwala, also sees virtue in Buffett’s idea of value-investing: “Value investing is also buying a stock, keeping it for 12-18 months and selling it at a handsome rate. Value investing is buying value which may not always be a lasting one. That value could be encashed over two or three years.” Jhunjhunwala looks for scalability of operations. He likes to buy small caps that could quickly scale into large caps but doesn’t worry about caps being large, mid or small whatever fetches value is fine and he goes for it.

Undoubtedly, investing and trading is a dynamic field and requires smart revision and adjustments in approach to grab opportunities. Both Warren and Jhunjhunwala, as shrewd investors, recognize this phenomenon well. It is apparently for this reason that they have departed from each other in certain ways. While Warren Buffett talks about people he admires and trusts, Jhunjhunwala likes to use the word “entrepreneur” to describe what makes an invaluable difference to his investment success. According to him bel ieving in the vision and the beliefs of the entrepreneur and evaluating the risks that may not be perceived by the entrepreneur any by showing interest in buying up small newspapers. He had earlier proclaimed his love for newspapers but in 2009 had publicly sworn off them as money pits. Though the internet has dented the business of newspapers, his thesis is that there is still a sizable population interested in local news and for that reason it makes good sense to make the small newspapers as viable business for a long time. Jhunjhunwala also has now drifted away from his usual investments and is keen on buying underrated land for malls in the south India city of Secunderabad, where he plans to build shopping malls, and backs private equity and other investments in a dredging firm, a radio station, a school and a security company. There is “a big explosion of purchases in India,” especially in areas like construction and jewelry, he said recently. One of his best recent moves was selling part of his stake in Indian rating company Crisil Ltd. to McGraw-Hill Cos.’

Standard & Poor’s Corp. for more than four times what he bought it for. S&P acquired a majority stake in the company last year. Today both Warren Buffett and Jhunjhunwala, by virtue of retaining a track record of their success, are acknowledged investing giants. They have a track record of amassing, managing and retaining wealth in most smart ways. They admit to making mistakes and accept that markets are supreme and for that reason learn from their mistakes.

Both are blessed with out of the box thinking and the ability to pick promising potential in a stock on time. This stands them apart from other investors. They are endowed with remarkable intelligence, wit and flexibility to adapt and catch the pulse of stock markets. Buffett champions real world pragmatism and fundamental understanding of industry and business. His Value Investing is based on Fundamental Decision, Human Behaviour and Psychology. In a company the market environment may change but these basics retain their significance. Jhunjhunwala builds further on WB’s approach by looking at companies which are not undervalued by the traditional measures such as PE, DCF etc. but by value which lies in the business model and what the company will develop into.

He understands that India’s concerns about economic slowdown are real but he is equally quite confident that growth comes from chaos, not order. So far his optimism has paid off. His approach might not be hard to understand but it is not easy to execute and this is what makes him an extra genius. Both the Warrens are not just after money but it’s the thrill of their being proved right makes them tick. For Jhunjhunwala money is not anything which is going to affect him and has committed to give away a quarter of his wealth in philanthropy particularly in education and nutrition. Buffett is into philanthropy for years and spends a large chunk of his earnings on welfare programmes. This aspect of benevolence and compassion in the personalities of two investing bigwigs make them more relevant for the society.

–Khushi Jain (weekly writer).