Power of Compounding gives you Financial Freedom in Market: Ramesh Damani, Member, BSE

Ramesh Damani, Member, BSE, talks about his love for BSE and his journey as an investor, stocks market, things on which a new investor should focus upon, how to find the difference between good and bad stocks among others during a candid chat with Anil Singhvi, Managing Editor, Zee Business. Edited Excerpts:

Q: You haven't changed even your designation like others and have kept it simple as a member, BSE. Why so?

A: Each and every brick of the ring - where we are sitting - tells a story. It was 1970's and 1990's when India actually liberalised and it was made possible just because we had BSE, a capital market that was existing for past 30 years, though it has been there for more than 100 years. It helped the great industries of today like Infosys, Wipro and Reliance among others to prosper. They prospered just because the entrepreneurs were able to come here and raise capital. BSE has a special history in the economic history of the country and I was very proud in 1989 when I became a member. Although, I have some work in corporate India and private equity also but I have been recognised as a member of BSE since my childhood and that's why I feel proud while saying that I am a member of BSE.

Q: It means BSE is not near your heart but it lies inside it?

A: Absolutely and this is my identity and has been the same when it is bullish or bearish.

Q: You completed your studies in America, a country where you would have been able to create a good career. Let us know about the thing in BSE and the Indian capital market that pulled you back to the country?

A: It happened due to my father. I was in technology business in America and that also did well. But I was the lone child of the family and that's why he wished that I have been there in America for 10 years and gained experience and that's why I should return back to India. But during our discussion in 1986-87, he said that he feels that there will be a boom in the Indian market and we are seeing it today when the Indian market has moved from 500-mark to 40,000-mark. With this, he said that if it would have been possible for me, then I would buy shares, lock the certificates - those were the days when shares were delivered physically - and then throw the keys as I may sell them. He knew that they will go up so much.

Then, he said that BSE seats are available at good prices, which is likely to go up and the business will boom over the next few years. After which, he asked me to be back to Mumbai and I never regret the decision as the cards that I took in 1988-89 in Rs6 lakh were sold at around Rs4 crore in 1993. So, it was a great journey. More importantly, the important journey is the Sensex, which is the barometer of our country, was at 500-600 levels in 1987-88 when I returned back to the country has crossed the mark of 40,000 today. So, it has been a very very good profitable journey. There are people who get frustrated when the market turns bearish and feels that nothing is changing in India. But, several things have happened in the last 30 years in India like the global financial crisis, GST and Kargil. Every issue has rocked India but yet business and index have found a way to go from 600 to 40,000.                     

Q: Let us know about your journey as an investor what is the special thing that you learnt when you started your journey and our readers can learn from it?

A: It is an interesting story and your company makes a difference. It was the same ring where I used to sit when I came to BSE, performed deals and made friends, who are friends till date. 

When I came to BSE then this was the ring where I used to make the deals and made friends who are my friend till date. In a few days, I understood that you can't make more money through brokerage but it is available in investment. You earn just one per cent through the brokerage but if your investment is a right one then it can increase by 100%, 200% and even up to 300%. My friends of that time, like Rakesh Jhunjhunwala, Durgesh Shah and Radhakrishnan Damani, taught me that India is a bullish country and growth is there. So, it is better to invest in equity instead of equity broking. It was 1992-93 - before which I had brokered for 3-4years - when Infosys IPO was announced. I dared to take its shares during the listing and off course the share went up 1000 folds. This change allowed me to look at equities. After, which I transformed myself from a pure broker to someone who was more interested in investing. Because I realised the wisdom of my friends that if India is going to grow at 8-9% GDP then the business will do very well. So, I think that helped - the people with whom I kept company with - me in my transition. 

Q: Tell us about certain things on which a new trader or a beginner who has just entered the share market should focus upon? 

A: Several things are there that should be taken care of and we will hit upon them. But the most important thing I feel that the investors need to realise in the market is the power of compounding. Its understanding will bring financial freedom to you. Let me explain how it works. You have a 30year career in the stock market, say, most of the people started at the age of 25 and by the time when they are 55 they want to retire and move on to other things like taking care of the family and social service among others. This means there is a 30year career in the market and if you can double the money in that career in every three years i.e. Rs10 lakh turns up to Rs20 lakh in three years, then you have 10 doubles in your life. And, this 10 doubles means that your investment of Rs10 lakh will turn up to be Rs100 crore, which means USD 150 million, which pushes you among the richest in the world. In the last 30years, Sensex itself has compounded 16-17% and to double your money every three years, you need to do it at 21-22%. Then you should include dividends and better stock picking, which gives you financial freedom. 

If you are a lawyer then you should advocate, if you are an engineer then perform your tasks and I will not ask you to come to the share bazaar. But if you have extra money for investment then I think the best way to think about it is to buy the businesses that can double in every three years. People are there who will say that this share will double itself in two months but don't listen to them because you know that in a long term the Sensex is moving at only 17% then you can outperform the Sensex in that kind of period is very unlikely but you can find businesses like ITC, Infosys, Reliance all the great companies of India that have grown at a rate of 17-20%. If you are able to do this then compare then compound your money. There is a single trick. If I would tell the secret of my business and making wealth - to my son and my grandson - for which we are here in the stock market, then it is compounding. You need to take a small amount of money as you can make Rs100 crore from Rs10 lakh in a matter of 30 years by finding great businesses. Ample opportunities are available in India and I can say that there always businesses available. And, the other point is that India is a very young country, so a lot of people are below the age of 25. At the point of time, when the prices are down - as it is at present - then you must not be a pessimist but be optimistic about it, because you need things at cheap rates and want to sell it at an expensive rate after 30 years. If you are pessimist just because the markets are low at present at least when you are young then it is not correct. If bargains are available and you can see good companies then buy them and keep the faith on it for the next 10-30 years.

Q: What is the formula to identify good companies that can give good returns after 25-30 years?

A: It is a difficult question but broadly we have a look at the intrinsic value of the company and its market value. Market value means price tag, a number of shares, debt sum, this will provide the enterprise value. But what is the intrinsic value of these shares? You were talking about PSU while introducing me than it is true as I found them at very cheap value. For example, I took shares of CMC at the start of my career, when its market value stood at just Rs30 crore. They have created the entire board system of the BSE and complete reservation system of Indian Railways is running on their support. So, it was a company with a lot of technological parks. Think of the Indian Railways, 2000 stations, all connected, online, real-time, printing tickets, accounting and other things were done by them. The BSE board system, the online trading platform that allows you to trade from anywhere and this were done by CMC. 

But if the same contract was given to IBM then it would have asked Rs500 from you but the company, CMC, that has done this was available at Rs30 crore. So, the market value was very small compared to what was the intrinsic value of the share. I knew the company was worth more. Its share went up 50x, 100x with the change in management and increased accountability and ultimately the company has moved to TCS. So, we made a lot of money on that. Such instances are available in the market as the market will always go between what they call as hope and greed. Gold is sold at the rate of Brass when there is greed, while there are instances when Brass is sold at the rate of Gold in the market. 

So as an investor, we need to find the time when Gold is being sold at the rate of Brass and then step into buy. It comes with little study, experience, having a circle of competency in the market. But, such opportunities are repetitive in nature and their absence would have scripted the end of the market. Opportunities have come, will come, and will continue to come and I am very sure about that. 

Q: Volatility is something that stops retail investors from being in the market. So, what do you do to control the emotions when the market is volatile and what is the thing that investors should do?

A: There is a need to focus on two things in the market and they are Risk and Volatility. Volatility is the nature of the beast and you can't erase it. The market will continue to move up and down and will be hard to understand. It is a time when someone with a sour mood sells the shares, which means there is a price cut. But, the next day's bullishness can raise its prices. This is the volatility in the stock. 

Risk in the stock is if you think there is a permanent loss of the capital over a period of time. As I said, even the BSE Sensex has compounded at 17% over the last 30 years since when the indexes have been formulated. So, distinguish between risk and volatility, which will continue to be in the market and if you feel that your shares should not fall then it is not going to happen. If you want a fixed return then fixed deposit is better and no question about it. But if you are young in India, are aged between 25 and 30, and are looking 20 years ahead, by when your children will grow up and you need funds for their education and marriage then the only way to do it is to invest in great companies of then and handle the volatility. You need a temperament. Risk is there if you lose permanent capital. Thus, there is a question that buys some great businesses. 

Q: How to distinguish the qualitative difference between good and bad shares? And, how not to sell good shares during tough times?

A: Peter Lynch has said, "What investors do is that they water the weeds and cut the roses. But, they keep watering to waste plants with a hope that they will grow like other shares". So that is a big mistake to make and this has been said by almost every biggest investor like Warren Buffett and Peter Lynch. You need to hold on your winners and cut the losses. But it is not that easy as at times there is a fall in shares and this can be a better buying opportunity. It is not so that every falling share is a bad one. The big mistake investors make is to think the price decides whether the stock is good or bad, i.e. if there is an increase then it is a good business but if it falls then it is a bad one. That is wrong to assume that as several things are happening in the market that has an impact on the prices. An investor should consider that they are buying a piece of business while buying the shares because such a thought will allow them to ride through the volatilities. So, it is important, whether you are young or old you should think that I have bought 100 shares or 1 lakh shares, which is a part of business and I should continue with it for at least 5-10 years until you prove yourself wrong or there is something from the management's end that can upset the business and it may lead to Losses. But if you thought about a good business just because its rate has gone high then there is no need to sell it and if the rates have come down then you should have the courage to step in and buy some more because you should buy more when you are getting something in the sale. It is unfortunate that people panic when there is a fall in the equity market and they sell them when there is a rise. 

Q: I want to learn the mantra of wealth creation from you beyond mutual funds. 

A: There is only a trick to make wealth and that is compounding and there is no other trick in the stock market for wealth creation. Sustainable wealth can be created in two ways.

First, as you asked about mutual funds, then, for most people, buy index fund when the markets are down. When the, your money will be doubled when the Sensex will rise from 40,000 to 80,000. Besides, over time, the Sensex moves 16-17% then your money will get doubled in 5-6 years. So, buying the index fund is the best way to do so. If you don't have enough time for the market due to daily chores then you should buy an index fund as the cost are very low there. In the case of PM scheme or mutual fund schemes, you lose 1-2% cost, normally, as trading/investment cost. It is a huge amount and there is a huge difference between a return of 17% and 20%. So, for most people, I would recommend to buy an index fund that attracts the Sensex and Nifty, very simply, buy them. 

For those who want to make an investment, look for great businesses that are available at low rates. My mother has taught me to buy everything when there is a discount, so, we should step in to buy the shares when there is a discount. 

Q: Tell us the way in which you identified PSU shares when you bought it and the process for wealth creation through them so that people can learn the art of identifying the themes and stocks at right time?

A: As I said earlier, CMC was a PSU stock and I thought, why it is available at Rs30 crore, as my experience said that these contracts are very expensive and were available due to certain reason. Plus, it was from my field, which helped me in it. It went up 100 times. When CMC started growing then I thought there might be more in the mine and then I saw companies like Bharat Electronics, which was available at cheap rates like Rs100-200 crore. I am talking about 1995-96. So, I bought the whole bunch of public sector stocks and they all did very well for us. Then, the index went 5x when Arun Shourie came. After that, we left those stocks. It is said that history doesn't repeat but its rhyme itself.

But in the recent past, I was not looking at PSU stocks but my son who has started new in the market went very bullish on these stocks. I was ignoring him a bit because they haven't performed in the last five years but he forced me to look and said that the new railway and defence companies that came in existence in recent past are trading well. So, he forced me to go through the analysis post which I realised that actual bargains were available in them. For example, there is a defence shipbuilder that is manufacturing a frigate for example. It was available at Rs1000 crore market cap with cash sitting on the balance sheet. So, I can say that such bargains are available once again like IRCTC, which I am not recommending but it brought an IPO and its stocks did very well. The reason that I am bullish now at PSU sector because (i) Order visibility of these companies, which is not available in private sector and we don't the kind of growth that will come from them, maybe 2% or 5%, as there is no visibility in them. However, these companies, PSU stocks, have visibility for the next 5-7 years as they have their order books with them. (ii) A lot of the private sector companies, especially those with high stocks, like HDFC and Titan, they are fairly rich PE valuations. These stocks are single-digit PEs with order visibility. (iii) Yield in the glamour stocks is under 1% in dividend deal and you are getting a dividend yield of 4-5% in these stocks. 

But, the most important thing is that a lot of these companies are going to be privatised and the government is committed to privatising HPCL and Container Corporation by March 2020. So, you are getting order visibility, single-digit PE, high single-digit dividend yield and possibility that over the next 12-24 months, a lot of these companies will be privatised or the value will be unlocked. The risk-reward ratio is providing certain sweet spots in it.  

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Q: Your father taught you to throw away the keys after keeping the shares in a locker. So, what is the lesson that you would like to provide to your son? 

A: I have a friend, who is also a Guru to me. And, once both of us were together during a social function where someone asked him that you have been in the market since the 1980s and have seen the ups and downs of 50 years in the market. Thus, according to you, what is the best decade for investing for you in the last 40-50 years. To which, without missing a beat, he said next 50. He has seen everything and has made a lot of money, is on the billionaire's list and has seen the ups and downs but he is that bullish about the future of this country. I think I will tell my son as well as my grandson also to be bullish as India is a growing country and has very ferule demographics. At times, we walk slowly because democracy takes its toll there but ultimately our leaders take right decisions. So be bullish on the prospects of this country. We have made money through PSUs and technology and possibilities are that you will make it through other things. But there are a lot of opportunities to make money in this market. And, I will tell them that my actual heart is for the BSE because, when I come to this building and see this centre then I realize how many great entrepreneurs have come here. The 1970s was a period of socialism in India when banks were nationalised. It was a time when BSE was only the institute that stood for private markets, free play market forces. I think India needs more of that and BSE is the best symbol of that.