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Wednesday, March 27, 2013

Rakesh Jhunjhunwala Portfolio Value Eroded by 1000 Crore

A naive investor who looks at the size of Rakesh Jhunjhunwala’s portfolio loss would be totally bamboozled. “Has the Badshah of Dalal Street lost his magic touch?“, the naive investor wonders. The ET report about the Rs. 1,000 crore loss that Rakesh Jhunjhunwala suffered on his midcap stock holdings has again sent investors into a tizzy. At times like that, one should take a step back and put things in their right perspective.

The first thing you should note – because it will immediately give you confidence – is that even in the short time that we have been tracking Rakesh Jhunjhunwala’s portfolio, there have been many ups and downs. In the great crises of 2008, Rakesh Jhunjhunwala lost hundreds of crores. However, when the market recovered, he made a Rs. 1,000 crore gain. Then again, when the USA lost its’ AAA rating in August 2011 and the markets plunged, Rakesh Jhunjhunwala first lost Rs. 316 crores which swelled to Rs. 700 crores by December 2011. However, by February 2012, the tables had turned. Rakesh Jhunjhunwala not only recovered all of his losses but made a handsome profit.

Now, all of this is possible if you have the vision, the common sense and the patience not to get bamboozled by the losses that you see on paper. Instead of throwing in the towel, you must carefully evaluate how you can take advantage of the situation like Rakesh Jhunjhunwala did.

If you ask, the truth is that not all of Rakesh Jhunjhunwala’s recommended stocks have been successful. But that is true of all the great investors like Warren Buffett, Peter Lynch, Sir John Templeton and the other legends.

Lets’ go back to that famous day in November 2003 when Rakesh Jhunjhunwala had recommended four stocks for investment: Titan Industries, Lupin, Geometric and Bilcare.

Now, ironically, Rakesh Jhunjhunwala had been a bit diffident about Titan Industries, warning investors to be wary of its high debt and high PE while expressing confidence that Geometric was “the biggest element of enterprise software” and that Bilcare would give “mind boggling returns”.

As history witnessed it, Titan and Lupin went on to become one of the greatest multibagger stocks of all time while Geometric performed so-so and Bilcare totally lost its way.

So, the fact that Rakesh Jhunjhunwala made wrong investments in A2Z Maintenance, Bilcare, DB Realty and other stocks that did not live up to their potential is no reflection on his capabilities as a stock picker especially when you bear in mind the fact that all of these stocks were in his non-core or trial portfolio. His core portfolio comprises of just 5 stocks (Titan, CRISIL, Lupin, Karur Vysya and Rallis) which make up 83% of the portfolio. And nobody can deny that each of these core stocks is a top quality stock with lots of steam left in each of them.

The clear message from Rakesh Jhunjhunwala to his disciples here is that they should not be afraid of making mistakes. If the process adopted by you in the stock selection is right, then though a few stock picks will turn out to be duds, the good ones will make up for them.

If you pause to ponder for a moment, you will realize that Rakesh Jhunjhunwala became a billionaire because he mastered the art of taking advantage of extreme pessimism when stocks of top-quality companies were available at throw-away prices.

Let’s look at a few examples:

In the late 1990s, nobody cared for PSU stocks because they were seen as inefficient users of capital. Investors held them in contempt and you could have bought truck loads of the stock at dirt-cheap prices.

Another example is the liquor stocks that were shunned by investors due to the Government’s prohibition policy. Well run and efficient companies like McDowell (now United Spirits) were selling for a song. You could have bought the entire McDowell, with its’ 50% + market share, for a piddling Rs. 200 crores (Today, giants like Diageo are willing to pay upto Rs. 25,000 crore for the company).

So, those were times of great pessimism when stocks were available cheap. There was no “risk” in buying these stocks though there was great “uncertainty” because nobody knows the future. Rakesh Jhunjhunwala took full advantage of the situation and bought huge quantities of the out-of-favour stocks.

The result: He became a billionaire!

So, now, the all-important message from Rakesh Jhunjhunwala is that investors must not over-obsess over the size of (his) losses. Instead, they must recognize the fact that all that talk about losses means that pessimism is in the air and there is a buying opportunity. Also investors must develop a strong stomach so that they are able to see through the market volatility. This is the only way they will make money from the market.