Good Business & Management decides the quality of the company: Raamdeo Agrawal, MOFSL

Raamdeo Agrawal, Chairman & Joint Founder, Motilal Oswal Financial Services Limited (MOFSL), talks about his experiences in the market, ways to earn from the market, how to find right companies and what should be bought among others during an interview with Anil Singhvi, Managing Editor, Zee Business. 

Edited Excerpts: 

Q: You have been in the market since 1980 and that' why I would like to know have you ever got bored from it in all these 40 years?

A: This is a passion for me and I am very lucky because my passion turned out to be my profession. Usually, I tell Moti to reduce the number of meetings, so that I can work on data. I still want to read the balance sheet and have a willingness to know about a new trend through books so that I can learn a new pattern of looking and analyzing the companies. Share Bazaar is huge where someone at any point of time can find something that others can't like Sanjoy Bhattacharya after his return from Japan was able to see Infosys in 1994-95 which was valued around Rs100 crore. It has turned out to be a company worth Rs lakhs of crores. That was a time when he understood the kind of future this company will have and has been sitting with its shares in his portfolio since then. A similar thing happened with me in 1995-96 with HDFC, when I had a feeling that it is going to be a big bank and it helped me in earning a very good amount from it. So, it's all about what you can see in the market and it should have your conviction backed by patience, which develops gradually. Initially, when I started in 1987, it was a situation when we bought them at Rs30-35 and sold it as soon as it attained Rs50 levels and never tried to know about the kind of company it was. Things changed slowly and I learnt that we sold them to early and they have grown 100-200 times. Between 1987-94 was a time, I used to study the balance sheets of companies passionately as a chartered account and tried to understand them and was able to understand the value a bit that a particular thing valued Rs100 is available at Rs30 or Rs50 but was not aware of the quality of those companies. Secondly, the search facilities were not quite good at that time, it was not digital and was very boring and we were studying the balance sheet by physically picking them, which was a big task. This was the case until 1994.

And, then I came to know about Warren Buffett and got a chance to read his balance sheet, which opened my eyes and I felt that there is a need of a 'Guru' (a teacher). I learnt a lot from him and got a clear path and then I walked on the routes defined by him to reach here. However, he works in the US and I work in our country, India. 

Q: I am in a habit of reading your wealth creation releases that are released every year and they are just fantastic. You have spent almost 40 years in the market and that's why I would like to know that have you earned the money just because you have stayed here for these many years or because you timed well about when you should buy and when to sell?

A: I haven't wasted a single minute in this. I was a super zero when started with the process because I belong to a family of farmers and that's why I didn't have it, the knowledge of the stock market, in my blood, I didn't have access to the balance sheet neither there were talks related to business. Then I came to Mumbai and then came to know about the kind of shares that was present here. Secondly, the balance sheet that you read while being a CA has also helped me to understand things. You will have a different experience if you will start things from zero levels, as you are supposed to learn everything, including the ways to bring the balance sheet, how to read it and then interpret the same then decide the number of stakes that can be bought. At the same time, I didn't have money for it, i.e. zero multiplied by anything will be zero, which means your knowledge will not support you to have a firm growth in absence of starting capital. This is why you take time in growing. It was a time, probably, when poverty was too huge in India. People were getting salary between Rs1 lakh to 2 lakh annually. So, what he can save? Just Rs25-50. However, today, bright students are getting a package of Rs25-50 lakh/year at the start of his career. Thus they have at least Rs10 lakh with them to create their fortune. Thus, it depends on the amount with which you start and the hard work that you put on it. A lot of hard work is needed when you are starting as you don't know anything about it. And, you learn when you fail, however, you may double or triple your investments when it is placed at the right place. This will increase your greed as well as fear. 

What happens the size your loss increases with the increase in your corpus and portfolio, for instance, we are running a business of thousand of crores at present thus even the size of the smallest loss turns up to be a loss of Rs200-400 crore. However, there was a time, when the loss size used to be small like Rs2,000-5,000 when the portfolio size was limited around Rs1 lakh. Now, the courage to lose is running out as the size of loss has turned huge. So, we are just trying to be protective and stay away from the losses but staying away from the losses will also not allow you to make huge profits, i.e. less risk leads to fewer returns. We are still running things and there are times when we also commit mistakes. So, you will have to understand the places where you must not go in terms of buying like management with bad integrity because they may make you fail at a point. But, you can find it out with practice. The second thing is related to timing the market, which keeps fluctuating and this is the biggest mirage. 

Q: What have you seen in these 40 years in the market in terms of fluctuations highs and lows?

A: Good thing was the absence of these many indexes till 2000 and such calculations were not possible then. I think, people were not able to track the kind of growth/fall in their portfolio as well as the market, till 2002-03, because the portfolio was not limited to just one place, i.e. it was scattered in which people had 10 shares of a company, 50 of the other, 100 of some other and so on. It was 1995-96 when I slashed my portfolio from 225 companies to 15 companies and it helped me in calculating the valuations. Secondly, it was a time when dynamic valuations were not available every day and there was a process in which you were supposed to be present physically and fill a sheet, which was a tough job and that's why you were not bothered. But it was required and was positive because you were not supposed to be worried a lot about your portfolio valuation concerning the market. So, you must not be worried about the market but for your portfolio, i.e. you should be aware of the kind of company that you are buying and the rate. The market will provide better returns vs the hard work that you did here. This means, if you have bought the right company at a reasonable price that is growing by 15-20% then your returns will stand between 25-30%. 

Q: But when he should buy?

A: The day when you understand it because every company is standing at a particular stage. Every company is not at the top nor the bottom. If Infosys and TCS have turned very big today then small companies have started functioning. If HDFC Bank and Kotak Bank have turned up to be a big valuation of Rs7-8 lakh crores then small banks have started functioning who have received brand new licence a few years back and haven't reached their bench even mark or if have achieved it then are earning Rs200-500 crores. This is a place, where you are supposed to find that this bank will grow 20-25% in time to come and get them the day when you get to know about it. You must have a theory about where you can earn money and who can earn. If you bet on a company that can earn 10 times in the next 15-20 years then no one can stop you from making 10 times more money, which may go up to 20-30 times. It is very simple, your returns will grow at the same pace at which there is a growth in the profit of the underlined company. So, you must not be worried about the market and should concentrate only on your company because the market is complex and quite big. It is impacted by the noises like what President has done and news related to China and that's why just have a look on the 15-20 companies that are present in your portfolio or the new company that will be added to the list and then work for it. 

Q: I have observed that you are not aware of the market and its conditions. So, let us know how it can happen in the case of a person who lives in the market can't have any idea of the index? 

A: I have to have an eye on the companies that are present in my portfolio to find out is it doing good or not. I am in a habit of keeping maximum 20-22 companies in my portfolio as they are those companies that will benefit me. But, about 1000 companies are present in the market of which 980 companies are not present in my portfolio, so Diwali or Dussehra in that block is not going to benefit me. Undoubtedly, the index allows you to know about the market condition but celebration related to it will not bring happiness. So, you should concentrate on your portfolio as its performance will benefit you in time to come. 

Q: Thus, you should have to focus on the quality of the companies that are present in your portfolio? 

A: Good business and management are two perfect choices and it will benefit you if they remain good for the next 10-20 years. However, goodwill always remains good, however, the kind of returns will depend on the growth of that company and the price at which the stakes were bought, it should be reasonable. 

Q: How many times you got an opportunity to get the stocks at low prices in these 40 years, i.e. how many times you have witnessed a correction of 50-70% in the market? 

A: Numerous times. For instance, it was 1990 when a company with a market value of Rs1 crore turned up to be Rs30 crore in 1992 amid Harshad Mehta bull run. Then it fell to 10 and then turned 100 in 2000 and again fell to 30 in terms of cash. Then it went up to 550 in 2008 and fell to 250 and has reached 1600-1700 mark at present. This means that you can't earn in straight term from the market and if anyone comes forward and says you can then you can't have the best liar them him. However, I wish to grow without a single scratch with a trajectory of 45 degrees but it can't happen. 

Q: When and how you decide to sell?

A: I think about offloading them only when I have some new idea and they can come at any point of time and place. It may come while you are sitting at the airport, a party, during holidays or some other place, where someone comes to you and shares the idea/story which shoots you and you feel that it is meeting your QGLP (Quality, Growth, Longevity and Price) condition. Now, it is a situation where you want to have it in your portfolio but it can happen only if you can create a place for it, which can be made either by trimming it completely or removing certain per cent of successful stocks or by removing a particular company. Thus, I have to create a space in the existing portfolio and this leads to sales. Stocks are sold because it is not performing or has performed a lot and we can book profit from it. 

Q: You spoke about QGLP. Do you think that a retail investor can adopt this four-factor in his portfolio? Is it easy for them?

A: It is very easy and natural. It is not Alpha, Beta and Gama. Good company and management is a cue. Growth is also important as it is needed and then you should think about the long term growth. However, today we are living in a condition where everyone is aware of the short term growth of a year or two and this why they have its valuation in the market at present. But, your long term call of 10-20years will reward you in a better manner. For instance, D-Mart is in demand and it is in demand not because it will grow by 50% and 25% in the next two years respectively but the market believes that it will continue to grow by 30-35% for the next 10-15years. Now, it depends on your conviction and belief on the talks of the market or you have more faith in it then the market. 

Never compromise on quality, bring a good company that is growing and have a prospect of growth like new banks for which the whole platform is open to win. Longevity relates to the duration, i.e. how long you can wait with them. Buy them at a reasonable price as buying them at uneven prices may create losses. With my experience, I can say that popularity and performance don't come at the same time. 

Watch Zee Business live TV below:

Q: Quality comes with a price which means quality can't be bought with cheap stocks?

A: It is not so. This is a place where your wisdom has to play. Have a look at the quality and then buy them at a reasonable price. For instance, have a look at HDFC Life or Bharat Telecom in 2003, they had the quality and it used to be the number one company in the wireless business. It was a time, the telephone was not available across the country but it was showing quarterly growth of 100%. It was a time when the whole company was available at Rs5,000 crore and its shares were priced at Rs25/share and it had equity of Rs2,000 crore. But, the company earned Rs30,000 crore in the next 5 years and there was a 50 times increase in its share prices. Interestingly, everything is not visible to everyone and that's why you will have to wait with a hope that you can find a comet once in a year.