In the latest part of CNBC-TV18 interview series, Wizards of Dalal Street, renowned value investor Ramesh Damani caught up with Kalpraj Dharamshi, founder and owner of Dharamshi Securities, to trace his multi-decade journey in the Indian stock markets.
Starting his career in the late 80s, Dharamshi came in contact with big bulls Rakesh Jhunjhunwala, from whom, he says, he picked up a lot of cues on investing as well as trading.
After transitioning from being a broker to a trader and, then, an investor, Dharamshi grew by -- as he puts it -- "reading, observing and committing mistakes" (he suffered a loss of Rs 1 crore following the September 11-triggered market crash).
But the journey was good to bring him into his own.
In this interview, he discussed his career, his learnings as well as his outlook on markets and stocks going forward.
Below is the transcript the interview on CNBC-TV18.
Q: Let me take youback in your life. In 2001, twin towers were falling in New York; your portfolio had a personal 9/11. Take me through that month in your life.
A: In September, 2001, we had been in a bear market for almost 16-17 months.
Q: The tech bubble had burst.
A: The NASDAQ tech bubble had burst and along with it, the entire globe, all the equity markets were falling. And I remember, you and me, we were at the Rotunda and somebody from my office called me and said there is an incident in New York and they are showing it live on TV – on CNBC. And we ran to Rakeshji’s office at Vithaldas Chambers.
Q: Rakesh Jhunjhunwala’s
A: Yes. We knew that something had happened which was going to change the world. And next day, I had Rs 1 crore of loss on my trading position and till that time, it was probably my largest loss. But, I had been through enough markets to know that it was also going to cause a capitulation.
The US markets were closed for three to four days. I knew, whenever they opened, bottom will be formed quickly. So, I had that knowledge or I had that premonition and I could visualise, I went all in into the market. I also leveraged, which I rarely do.
Q: Markets can remain irrational long than we can remain solvent. So, in 2001, with the market in such bad shape, the old economy crumbling, what gave you the confidence to be bullish?
A: You had stocks available 8-10 percent yield. I knew valuation wise, I could not go wrong. It was only a question of timing and thankfully, I got it right.
Q: How did you figure out Dalal Street?
A: My dad was in the markets prior to me joining him. I used to do the back office work for him while I was doing my articles and I was very keen on joining the markets. I knew chartered accountancy was not for me. I wanted it as a qualification, so that I could marry a decent girl.
Q: So, take us through your early career? What would you do? Were you a trader? Did you do brokerage? In the early years of Dalal Street, describe the flavour and what was your role in that?
A: I joined the markets late 80s and in those days, there were no investors - there were only brokers and traders, speculators. Unfortunately, we had a set-back in broking – a client of ours defaulted – and so for four or five years, I had blinkers on till the Harshad Mehta bull market, it was all broking, broking, broking.
So, my career was broking, trading and then evolving into an investor. Of course, the trading has not stopped, but the investing part is now much bigger.
Q: What were the early influences in your life?
A: In the mid 90s, I met Mr Warren Buffet -- through books of course -- and that opened up my eyes. I decided broking had to be done properly. I asked my friend Arvind Joshi to join me.
We started Value Quest Research in those days and as we started researching the market properly, in the next two, three years and in my course of becoming a broker I was visiting all the high net-worth individuals (HNI) and I came across Rakesh Jhunjhunwala.
Q: An early influence in your life?
A: Absolutely, and a tremendous influence. Rakeshji is totally transparent. He shares everything with everyone. So, it was a tremendous learning experience for me to see how it is done.
Reading about it is one thing, but to see it being practiced on a large scale, your horizons broaden, your risk taking ability goes up, you are able to scale up your trades, you are able to scale up your investments, you are able to size up opportunities better and to apply that theoretical knowledge, that is what helped. So, in the early years, I would say, it was Arvind’s research and Rakeshji’s influence.
Also, he made me or through him, I met a lot of the smartest people in the market. I met you, I met Radhakishanji, I met a whole bunch of people.
Q: And you all contributed to each other’s lives?
A: Absolutely, we are all ‘market ka keeda’.
Q: But, you said that the early influences were Rakesh, but give me one or two things that helped you figure out your own thought processes as an investor.
A: One thing Rakeshji and Radhakishanji, I remember, we were having a drink in the Harbour Bar and I always keep asking Radhakishanji about his style - what he was doing.
Q: That is of course, Radhakishan Damani.
A: RK Damani. And without asking at least five times, he would not come out. And one day he said, “Trading may be only paise 5-10 of my wealth as of now, but without that 5-10 paise, the other 90 paise would not come.” So, that kind of clicked. So, you earn and then you deploy it as investment and that is how you grow rich. And these were the smartest.
So, what we did - me and Arvind - was study how the richest people had made money through the market - how they did it, their methods.
Q: You really did that? You actually went through a list of 10 people and how they became rich?
A: Absolutely, the three ways of learning are reading, observing and committing mistakes yourself. So, I have had my fair share of mistakes. I also read and I also observed and observing firsthand at that close quarters, I was privy to Rakeshji’s thinking, I was privy to Radhakishanji’s thinking.
Q: How did you become friends with them? I mean you were a Kalpraj Dharamshi, a new entity broker. Rakesh was already a larger than life figure. How did you strike up a friendship?
A: I do not know, it was friendship at first sight and he is a large hearted man and he took a liking to me. I do not know, you can ask him probably.
Q: What were your first initial ideas where you actually bet your money and how did that work out?
A: Coming from my background in broking and the setbacks I had early on and surviving the 90s - 90s was a very bad period in the market and in the 90s you had a lot of fly by night operators - all kind of shenanigans in the market, SEBI had just been formed in 1993 and till the regulation was in place a lot of things happened in the market where people burned their fingers badly.
So, having survived that, I had that conservative gene in me. It was all MNC investing till that point in time, till I saw people making big money in other kinds of stocks also. So, in the earlier years it was all Cadbury, Colgate, Castrol, digital equipments.
Q: One of the finds that if I am distinguishing about you, is that you keep a trading portfolio and keep an investing portfolio. Keeping those two are different, it is trying to lick your elbow, it is almost impossible. How do you do that?
A: It is difficult and sometimes you end up making mistakes, which turnout to be costly. The thing to do is separate them mentally in your mind as well as physically to keep to separate accounts, so that the revenue department also does not have any issue with it.
You keep your trading separate and you keep your investment separate. And never trade in the stock in which you have invested. So, if you have invested in Infosys, do not trade Infosys for whatever percent. You might think at some point in time Infosys is going to react 10-30 percent. Just hold on to Infosys, if you want to hedge, do it in the F&O and do not mix the two. That is the way I found that you are able to segregate the two.
Q: But you buy whether a trading position or an investment position because you think it is going up. So, how do you segregate them?
A: There is a lot more fundamental analysis behind an investment. Whereas trading is largely price based, there is of course at the back of your mind a vague understanding or an understanding of the stock you are buying or selling at that point in time. You know whether it is overvalued or undervalued but price.
Q: Let me take you back to investment style. From the 90s you evolved, by 2000s you have become a successful investor. What were you looking for in great stocks, what were the characteristics of great stocks that you found?
A: What I learned from Rakeshji and then I sort of internalise is you go for stocks or companies which are addressing large opportunities.
Q: For example?
A: Titan is addressing jewellery market, it was not. It was addressing the watch market. There also it was a two player market. So, you find companies in niches which are addressing large markets and do not have too much competition. Amara Raja in batteries.
Q: So, first big opportunity, that is what you look for. Big external opportunities?
A: Big external opportunity, you stay away from the one which have a bad balance sheet. Most of the investors what they do is they start investing with P&L. Profits, earnings, EPS, PE.
The first thing to do is check the balance sheet, whether there is a hole in the balance sheet or not. What are their accounting standards, are they investor friendly, does the management have a reputation for integrity.
Q: Does it pay taxes.
A: Does it pay taxes, does it pay dividend.
Q: What is the debt, what is the gearing?
A: That is the first. I never invest in a company which is leveraged.
Q: How important is to address quality of management for you?
A: It is really important, because finally it is the efforts of the management which will get you a three bagger or a ten bagger. This is the different between Mastek and Infosys. They were both in the same business, both pioneers and in the early 90s or mid 80s is when both the companies started. See the difference, it was just people. You had Narayana Murthy and you had Mastek. See the difference in the market cap of both. So, it is finally people who will make you money.
Q: Even when you started in your career obviously you found some great businesses as you said. Are there still great businesses available that investors can find value in or are the opportunities behind us?
A: It is never like that. Greed and fear always gives you an opportunity - uncertainty, doubt, fear, panic, despondency. So, a market without any of these characteristics is not a market in which you should be investing. Right now, we are probably somewhere between fear and panic.
These are the markets where you know the froth has been taken care of. Stocks may be expensive or cheap based on their individual capacity and you can have a look at them, but a market where there is froth, where there is euphoria, where there is optimism - those are not the markets where you want to buy in.
Q: So, you are telling me that in every crisis you spot opportunity?
A: Every crisis, yes. But is this a crisis or is this a garden variety correction is what you need to figure out.
Q: That is different but I am saying generally over the last 25 years crisis investing has helped you?
A: Absolutely, if there is crisis it is an opportunity.
Q: People should step in?
A: It is an opportunity to buy if there is a crisis, there is an opportunity to buy.
Q: In both our careers the index has gone from 800 to 28,000 at the peak. So, a lot of people, a lot of kids tell me that the best is behind us and that everything is well discovered. What would you say to them?
A: I don't think so, there are as many opportunities in the future. What these kids are probably telling you is that they did not or were not able to participate in the 100 or 200 winners that have happened so far in the last 25 years.
Q: They were new; they are new to the market.
A: Exactly. So, they did not get an opportunity but then they are looking in the rear view mirror. As we speak there are probably 100 ten baggers and ten 100 baggers sitting right there. You do not know, you need to figure that out.
Q: You figure that out in the future.
A: Absolutely.
Q: Take me through some of your best investment and what propelled you to that investment and when you bought that trade did you know that this is going to make me money?
A: In some cases it is very apparent, say, for example I missed out on the IT boom, I had no clue. So, I went on a crash course trying to learn and we had the bear market post the NASDAQ bubble. So, in that you came up with the IT, Business Process Outsourcing (BPO), ITES segment and it sort of appealed to me and we were all searching for companies. So, if you remember we had gone and met the CEO of a company e-Serve, which later became e-Serve but at that time it was Citicorp Securities.
Q: And later merged with TCS.
A: Absolutely. So, it was doing BPO work for Citibank in-house transaction processing and it was available for a market cap of Rs 120 crore and it was addressing probably USD 10 billion worth of market.
Q: With obvious opportunities.
A: And in-house and it was listed and we came down from that meeting, I remember on the footpath we were standing and discussing why is this company listed. We finally came to the conclusion that this was probably because god wanted us to be rich.
Q: Failures teach us a lot. Very good investor has had his number of failures. What are some of the things that still rankle you?
A: I invested in a company in my earlier years, say, early 90’s in a company called Shree Vallabh Glass - went to zero. I still have the physical certificates of that company with me. And then in mid 90’s or late 90’s, I had bought into a company called Swojas Energy which was taken.
Q: Parmalat?
A: Parmalat, yes. Parmalat was an Italian company, which itself went bankrupt and lost 100 percent of my money on both those investments.
Q: Who do you blame for this loss?
A: Myself. Nobody else. It was definitely me.
Q: Is that a characteristic of investors that they take responsibility for the decision thought the management, analysts?
A: All decisions you are responsible, and if you do not own up to that, some point in time, you will get into a psyche where you start blaming others. You are headed for trouble.
Q: At what point do you question the validity of the hypothesis after it is down 10 percent, 20 percent; the earnings don’t come in. When do you question how the stock has been?
A: What I found is that within the first six months, I have a fair idea whether an investment is going to work or not. Till the time you invest your money in it, you have an idea of a stock which is entirely different. It changes as soon as you put your money into it. Then you start digging more, you spent sleepless night.
Q: Surely, you don’t invest before you investigate?
A: Even after investigating, once you invest the motivation; your intellect does ten times the work it is supposed to do or prior to investing. So, what I find is within a first six months I probably have a decent idea of whether something is going to work or not. Say for example a recent investment of mine, Delta Corp.
We bought this four years back. It is a gaming company out of Goa. They have a property in Daman where they are awaiting regulatory licenses for starting their casino. I had high hopes for this company and I still do, I own it, I haven’t sold a single share.
Q: Not recommending it but just discussing it.
A: Absolutely, recommendations, I am not recommending anything.
Q: Just to be sure about it.
A: Yes, the regulators take a very different view.
Q: The odds are against that.
A: Absolutely. So, I am not clear in mind whether it will work or not. They need to become asset light, they need to dispose of their assets. They need to bring down their debt and they need to get a license over which they have no control.
Q: The environment has to change.
A: So, once that happens - it is a 40-45 percent gross margin kind of a business. Most of what they will have if they get rid-off their debt is a small balance sheet Rs 500-600 crore and they do Rs 300 crore topline out of Goa. They can probably do any other Rs 300 out of Daman. They are a pioneer, they have no competition. It is a unique company and if they do manage their Daman license and they lighten their balance sheet I see a bright future for them.
Q: Let us go from Delta to Alpha. What is the Kalpraj Dharamshi template after 25 years of evolution. How do you pick stocks, what are the characteristics of a good investor that you think are important?
A: Temperament and discipline - I find are more important than intellect or curiosity, that is important. Intellect is required but you need to figure things out in your own sweet time, but you need to be ahead in terms of deciding – if you can decide fast, when you see an opportunity.
What I have found is that of all the successful investors, 10 stand out. That means, they have an omission of 190, 290, 390 stocks which went on to become 1,00,000 baggers and they did not invest in.
Q: It does not matter.
A: It does not matter. You need to get your 10 stocks right. Bet big on those 10 stocks and then wait it out. Back up the truck. I am yet to back up the truck, but now, my mini station wagon I am able to back up.
Q: But that is always to key, right? To find a great idea and back up the truck?
A: Absolutely, bet big.
Q: Temperament is that. What is the discipline part that investors need to learn?
A: Well, you do not need to listen to everybody’s opinion on your stock. If they have an opinion and listen to it and form your opinion, hold your conviction. First get yourself convinced, once you have conviction, hold on to it.
If you feel that there is actually a reason – there may be the best of investors out there telling you that your investment is wrong. It happens to us because we all move around in a circle where the next guy is as smart as you or probably smarter than you. And his opinion, you have to give weightage to. But you need to stick to your own conviction also and that is what I meant by discipline.
Q: Conviction - that will surprise me about interviewing so many wizards, that everyone has found their own stocks to riches. It is not that a common stock, everyone bought a Tide Turner, everyone bought an Infosys, and everyone bought an MRF. All the people in stocks find their own stocks because that is their passion.
A: In the early days, say, the early 2000s. I invested in a lot of stocks with Rakeshji, with you and it was quite okay with me. Now, not so much, I am seeing my portfolio maybe has 10 percent commonality with Rakeshji’s.
Q: It is your own ideas.
A: Absolutely. And you have more conviction for those. And only if you have conviction you can hold large positions through periods like this.
Q: Absolutely, it is the most important thing. You are in still the late summer of your career, you have done very well for yourself, does money still drive you or is there other things driving you right now?
A: It cannot be money. At a point in time, you decide you have enough and you are not – I mean, I come from a middle class background, I do not want a private jet, I do not travel business class, no yachts for me, I am fine living the way I am. Once in a while, I need a expensive holiday, but that is about it.
I do not need expensive scotches, I do not drink scotch. So, my lifestyle I can probably maintain with what I have. That is not what drives me. Finally, an investor who has crossed the threshold is what I believe in.
Q: I agree. Money is a way of keeping score, nothing else. Just to wind up this show, I have a rapid fire round for you. So, let us have some fun with that. The first thing, a CA education is?
A: Gives you an idea or a fairly detailed knowledge of accounting which is essential for you to be able to read a balance sheet which is required for investing.
Q: Sensex, 50,000, buy?
A: I do not know. I have no clue.
Q: The investor you admire the most in India?
A: Mr Radhakishan Damani, Mr Nemish Shah and Mr Rakesh Jhunjhunwala, not in that order but only three qualify in my mind.
Q: Next item on your bucket list.
A: I have a whole list of place, which I need to visit and I have been neglecting that.
Q: So, travel?
A: Travel, absolutely.
Q: Now, say the first thing that comes to your mind when I say the following: Maldives?
A: Paradise.
Q: Youth or money?
A: Youth.
Q: Philanthropy?
A: Big responsibility and my dad started me off, I have got big shoes to fill.
Q: Poulomi?
A: Poulomi is my daughter and she is my life.
Q: Singing?
A: it is my passion.
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