Here's a look at Dalal Street's not-so famous top investors

http://economictimes.indiatimes.com/markets/stocks/news/heres-a-look-at-dalal-streets-not-so-famous-top-investors/articleshow/49810442.cms

Here's a look at Dalal Street's not­so famous top investors ­ The Economic Times

By Shailesh Menon, ET Bureau | 17 Nov, 2015, 07.16AM IST Post a Comment

Here's a look at Dalal Street's not­so famous top investors

They are some of the biggest investors in the stock market, with an uncanny ability to pick the right scrips. Their preferences are cues for not just ordinary investors but also prominent fund houses. Shailesh Menon profiles a bunch of investors who despite the tremendous influence they wield on the market are not thrilled with the limelight.

Bull markets create heroes and zeroes: Ashish Kacholia

Age: Mid­ 40s

Comfort zone: Mid­ & small ­cap stocks

Winning stocks: Pokarna Granites, Vadilal, Axiscades Engineering, Acrysil, and Shaily Engineering Plastics

When Ashish bhaiya (as children call him) visited the Samaritan Mission School at Tikiapara near Howrah in West Bengal 13 years ago, it was a 350 sq ft room with three windows and some 25 students — mostly children of rickshaw­pullers, housemaids and drug addicts.

"Bhaiya's eyes welled up when he saw our kids sitting on the damp cemented floor," recalls Mamoon Akhtar of Samaritan Help Mission, which runs the school. While departing, Ashish bhaiya handed the first of his numerous cheques favouring the Samaritan Mission.

Today, the school imparts digitised education to over 3,000 students, boasts a playground and a vocational training lab, all thanks to the generosity of Ashish bhaiya and his rich friends from Mumbai. Little do these kids know that their bhaiya is one of the most influential investors on Dalal Street.

Every morning before the market opens, a raft of WhatsApp stock tips/messages that float around lists trades done by Kacholia the previous day. Stock market blogs typically mention Kacholia's portfolio every quarter. Dealers and stock­pitchers sell investment ideas to potential investors saying, "Kacholia ne entry maara hai." His fan following is such that stock market enthusiasts have started comparing Kacholia to the likes of Rakesh Jhunjhunwala and RK Damani, the high­profile investors of Dalal Street.

Kacholia started his career with Prime Securities and later moved to the Edelweiss' equity research desk. After learning the ropes, he started his own broking outfit — Lucky Securities. He accepted mandates from investors, and in a short time, was making money for them. But then if you know how to make money, why would you do it for someone else? From 2003, Kacholia started focusing on building his own portfolio.

As is his wont, Kacholia did not invest in tried and tested large­cap stocks. He pushed himself to find new investment ideas in the mid­ and smallcap space. This strategy paid off as companies such as Pokarna Granites, Vadilal, Camlin, Axiscades Engineering, Acrysil, Lokesh Machines, Zen Technologies, Shaily Engineering Plastics and Ashiana Housing turned multi­baggers (record gainers in stock market parlance) in his portfolio. Kacholia holds investments of nearly Rs 350 crore in companies where he has more than 1 per cent shareholding. "Ashish does a lot of research before investing. He's a risk­taker; he buys shares in chunks if he's convinced. He meets the management if his investment is large," says a broker who executes trades for him.

Kacholia believes in testing the strength of his portfolio. So if the overall market momentum is weak, he dumps a portion of his holding to check for price resistance patterns. If the stock manages ride out even during an "engineered selloff", he increases his holding. Kacholia does not hold more than 25­30 stocks in his portfolio at any given time. His price target is usually 1.5­2 times the buying price. That said, if company fundamentals turn negative mid­way to target, he dumps the stock dispassionately.

Kacholia leads a simple lifestyle. He also stays away from the spotlight. "I am a private person. Bull markets create heroes and bear markets create zeroes. So, I'd rather stay anonymous," was Kacholia's response to ET's request for a meeting.

Mukul Agrawal: Aggressive but does not put principal at risk

Age: Mid ­40s

Comfort zone: Aggressive trading, long ­term investments, large bets

Winning stocks: Bharat Bijlee, Hindustan Dorr­Oliver, Honda Siel Power

Mukul Agrawal is the newest kid to break into the rich club on Dalal Street.

"Mukul smells and breathes money," says a long­time acquaintance. "He's not scared to take large bets, but he does that only after consulting several other investors and fund managers. He has got a good ring of friends in the market," he says. 

Agrawal's bets are often in the range of Rs 20 crore to Rs 50 crore. He is known to keep two portfolios — one for investments and other for trading. Stocks like Nesco, Unitech and Wockhardt have yielded good returns for Agrawal over the years. Bharat Bijlee, Zen Technologies, Rico Auto Industries, KDDL Ltd, Shalimar Paints and Sunshield Chemicals are said to be his other top picks.

Hailing from the Mumbai suburbs, Agrawal and his brother Mayank started investing in stocks in the late­90s.

As many investors did those days, Mukul Agrawal started trading aggressively on market information and stock tips. When he started making money on his trades, he increased his bets. Eventually, he started following the investment pattern of some of the savviest and most notorious stock traders of those times.

It is not known if Agrawal had a direct hotline to some of these traders, but their aggressive investment style impressed him at least a little, according to brokers who have known him for several years.

This is evident from his trades in a leading pharmaceutical company where he entered and exited (the counter) multiple times. "Multiple entries and exits are a pure trading strategy and Mukul has perfected it very well. He makes a lot of money like this," says the research head of a broking firm. Apart from gathering market consensus, Agrawal is known to be a stickler for research, especially when he is buying in his core portfolio. "Mukul is aggressive, but he does not put his principal at risk. He meets the management of companies where has long­term investments," said the equity sales head of mid­sized brokerage.

Apart from equities, Mukul Agrawal is also known to have investment interests in real estate. He is said to have funded several real estate properties in suburban Mumbai, it is learnt.

Agrawal's success in stock markets comes partly from his close circle of friends. He talks to a wide array of investors ­ right from highlyplaced fund managers to long­only investors and market­movers.

"He's lion­hearted for sure," says a top broker, adding, "He'll take you along if you are his friend."

When stock markets tire him, Agrawal and his friends go on fun trips abroad — to the snow­clad peaks of Switzerland or Fisherman's Wharf in San Francisco. If the chips are down on the bourses, the gang embarks on trips to temples or Gurudwaras. On Makar Sankranti day, they fly kites atop terraces.

I listen, research and buy stocks in good numbers: Rakesh Kathotia

Age: 47

Comfort zone: Risky bets, stock views and intel

Winning stocks: Century Plyboards, Escorts, Sical Logistics, Essel Propack, Strides Arcolab, Eros International

Rakesh Kathotia bought his first shares 30 years ago while pursuing graduation from a college in Kolkata. Little did he know that the 100 shares of Andrew Yule Company he bought — on a tip from a friend — would hook him to the stock market for life.

Having lived through six rip­roaring bull runs, five depressing bear phases and two big scams, Kathotia has evolved into a wiser and more careful investor. "But I still take a lot of risk. Stock market is the only place where you can take risk; you have to take risk to make money on the bourses," he says. "I listen to a lot people who have a logical approach to investing. If they make sense, I do my own research on the stock; and if I am convinced, I buy the stock in good numbers," Kathotia explains.

Kathotia's moment in the sun came in 2007­08, in the thick of India's biggest bull­run, when he made significant sums of money across trades. Market intermediaries who have long worked with Kathotia describe him as a momentum player. "He rides momentum stocks... he takes a big position, waits for the stock to appreciate and then dumps without any care," says a retired fund manager who has known Kathotia for over two decades.

Kathotia learnt the tricks of the trade while working with a chartered accountant in Kolkata. He relocated to Mumbai in 1987 and a few years later, started a company that lent working capital to corporates. All this while, he dabbled in stocks making small investments and booking profits regularly. The failed venture forced Kathotia to go back to the stock market. His next big break came during the tech­boom, when he made a lot of profitable investments. "Despite having a good run then, we lost money in some IT counters," Kathotia recollects.

In the lull that followed the tech­bubble burst, Kathotia started a private equity fund, Subhkam Ventures, which cut PIPE (private investment in public equity) deals and provided growth funds to startups. The PE fund has exited investments in over 15 companies till date. Kathotia returned to active stock trading at the onset of last bull­run. "We actively participated in the 2006­-08 bull­run. Frankly, many of our trade leads were informationbased, but we studied those stocks well before investing."

Kathotia looks at operating cash flows and free cash flows prior to investing in a company. Most Indian companies do not have free cash flows; in such cases, Kathotia focuses on companies with significant RoEs. He also invests in well­managed companies with low operating cash flows, provided they have robust business prospects. Zee TV, Unitech and DLF are among stocks that have turned in good yields for this investor. "I like finding new companies to invest. I track mid­ and small­cap stocks very closely," he says. This hobby of investing in lesser known stocks has cost him dearly a few times, especially in falling markets. "Some of my picks during the tech boom touched zero in value. Till that time, I never believed the stock price could ever touch zero," he guffaws

Friends are important in stock markets: Kalpraj Dharamshi

Age: Late­ 40s

Comfort zone: Technical and fundamental research, influential friends

Winning stocks: Elecon Engineering, Natco Pharma, Delta Corp, SQS India, E­Serve (later merged with TCS), TVS Motors, Marksans Pharma

The fifth ­floor office of Kalpraj Dharamshi in central Mumbai reminds one of the den of Gordon Gekko, the protagonist in the Hollywood movie Wall Street. The room, not large, has soft lighting and is filled with an L­shaped work bureau facing three dealer tables, an array of computer monitors (each displaying charts, excel sheets and portfolio listings), two bronze bull figurines, telephones, piles of neatly arranged folders and an elliptical trainer at the far­end. It is from here Kalpraj Dharamshi punches in his winning trades.

Kalpraj Dharamshi (KD to his friends) is reclusive unlike his more famous friends Rakesh Jhunjhunwala and Ramesh Damani. Dharamshi prefers to be like his mentor Radhakishan Damani ­ silent in his approach and dead accurate while making investments.

Dharamshi and his friends were among the first to find value in niche businesses. Stocks like Amara Raja Batteries and Titan have yielded decent portfolio returns for this pack of value­hunters. Dharamshi is also a big investor in Delta Corp, which runs offshore casinos in Goa. 

After much persuasion, Dharamshi met ET in his office a few days ago. His only condition was: "No interview please." "Why should I come out now? I've nothing to tell anyone," he dismissed our pleas for an interview in one brutal stroke. Nevertheless, Dharamshi played a gracious host for the next 90 minutes, discussing stocks, markets, market cycles and strategies. He entered the market in the late 80s as a stock dealer. A few years of internship with leading brokers, some experience calling out trades on the trading ring and friendship pacts with a handful of young promising investors, Dharamshi was ready to start his own broking venture.

A few years later, Dharamshi shut his broking business and turned a fulltime investor. His first big jolt as an investor came in 2001, when the markets went into a tailspin post the 9/11 attack. Dharamshi, at that time, was betting big on stocks — especially of IT companies.

After lying low for a few months, Dharamshi cleaned up his portfolio for a fresh start.

The cornerstone of Dharamshi's investments is solid research. KD relies a lot on technical research, according to friends. He is also known to meet managements before making large core­portfolio investments. Dharamshi is also fortunate to have well­connected friends like Damani and Jhunjhunwala to guide him through tough times.  "Friends are important in stock markets... you need sensible people to correct you when you are reading markets wrong.," Dharamshi is known to have told an old acquaintance.

Dharamshi hunts for quality companies with good growth prospects. He is not much of a "sector picker" as he believes there could be several well managed companies in sectors facing temporary cyclical headwinds. He does not buy highly ­leveraged companies and 'turnaround stories' either. Marksans Pharma, Elecon Engineering, TVS Motors and Natco Pharma have been some of Dharamshi's best investments in recent years. Besides investments in stocks, Dharamshi has a small portfolio of private equity investments, but these have not yielded very well for him, say market insiders.

"KD is not a very interesting investor. He's more long term," says a Mumbai based high­profile stock investor.

Hitesh Ramji Zaveri: Winning with large chunks in penny stocks

Age: Late ­50s

Comfort zone: Special situations specialist, small­cap and penny stock focus

Winning stocks: DIC India, IFB, Williamson Magor, AP Paper Mills, Tarai Foods, Uniply Industries

Barring a few old­ timers on Dalal Street, nobody knows Hitesh Ramji Zaveri that well. Zaveri has no clique or friends, a trait he shares with some of the most successful investors. Not many brokers have dealt for him, and barring a few spreadsheet enthusiasts, no one has seen the depth of this portfolio.

Zaveri holds more than 1 per cent in nearly 60 companies, mostly penny stocks with prices ranging between Rs 5 and Rs 15 a share. Shervani Industrial Syndicate, Mahasagar Travels, STEL Holdings, Shree Steel Wire Ropes, Belapur Industries and Farry Industries are among his top picks.

"These are mostly kabaadi stocks (scrap quality); don't know why he's holding so many such stocks in his portfolio," says a stock researcher.

"For all you know, Zaveri must have bought these shares at very low prices. Since he holds large chunks, any minute bounce in prices would bring in good gains," adds the researcher. Zaveri did not comment for this article.

Zaveri could be a very influential shareholder in several of these companies, according to a Mumbai­based stock broker. This is evident from his predatory dealings in consumer durables company IFB, where Zaveri picked about 14.35 per cent in early­ 2000. The IFB management had then approached the Company Law Board (CLB) seeking protection against a hostile takeover bid by Zaveri. The CLB ruling favoured IFB and forced Zaveri to exit the company, though he made a neat profit. In 2014, Zaveri thwarted DIC India's delisting plans by asking for a better share buyback price. Zaveri holds 2.72 per cent in DIC India.

"He must be a very dominant shareholder in companies where he has chunky holdings. Zaveri seems to have a lot interest in 'special situations' like delisting, where he can force companies to pay better buyback prices," the broker adds.

A savvy Mumbai­ based operator, who says he met Zaveri once socially, recalls: "He seems to be a well­ informed investor. His investment style is more penny stock­focussed. He likes small MNC stocks as well."

The secret of Rakesh Jhunjhunwalas success

http://www.livemint.com/Money/r06HO0RUtK82ReZnxPzKwL/The-secret-of-Rakesh-Jhunjhunwalas-success.html

The secret of Rakesh Jhunjhunwala’s success

An analysis of Rakesh Jhunjhunwala’s portfolio shows that his average returns have been highest from the stocks he held the longest

Sachin P. Mampatta

At a time when high-frequency trading has allowed market participants to transact in milliseconds, India’s best known stock market investor’s average holding period is still measured in years. And his highest returns are on stocks he has held for at least 10 years.

A 10-year analysis of 84 companies in which Rakesh Jhunjhunwala has an at least 1% stake reveals that he holds his investments for an average of 3.44 years. He has held his stakes in nine companies, including Crisil Ltd, Titan Co. Ltd and Lupin Ltd, for 10 years or more. He has held stakes in 15 others for between five and 10 years. And he has held his stakes in 65 out of 91 investments for at least a year.

In comparison, the average holding period for diversified equity mutual funds has never exceeded two years in the last decade, according to data from fund-tracker Value Research. The minimum was 0.93 years in September 2009, just after the outbreak of the global financial crises. The peak was 1.92 years in March 2015.

There is a caveat to this analysis of Jhunjhunwala’s holdings: Information is only available for companies in which his stake exceeds 1%, and is therefore mandatorily required to be disclosed. The analysis looked at 84 such stocks. There are also companies in which he bought and sold his shares, only to buy again later. These were counted as separate investments, with returns being calculated for each entry and exit. The total number of investments thus comes to 91. The analysis does not consider parts of his portfolio about which information is not publicly available. It can therefore only be considered indicative and not necessarily representative.

Jhunjhunwala declined to comment for this story.

The analysis shows that his average returns have been highest from the stocks he held the longest. His average absolute return on stocks he held for at least 10 years was a staggering 3,271.52%. And his average return on stocks he held for less than a year was 9.23% (chart 1). These returns are a simple average of the returns of stocks in his portfolio irrespective of their weight in the overall portfolio

The 3,271.52% return figure is owing to multibaggers such as Lupin (13,855.7%), Crisil (5,588.6%) and Titan (8,272%) which Jhunjhunwala spotted early on. Not all long-term holdings have been a success though. Share prices of Viceroy Hotels Ltd and Bilcare Ltd are now lower than what they were a decade ago (see chart 2).

“In the long run, stock markets in general have been seen to move in an upward direction. Therefore, the longer you hold on, the probability of superior returns is quite high,” said S.S.S. Kumar, a professor at the Indian Institute of Management, Kozhikode. Indeed, the S&P BSE Sensex has risen from a notional value of 100 in 1979 to a high of 30,024.74 on 4 March 2015.

This tailwind certainly helped Jhunjhunwala’s longer-term holdings. Returns were calculated based on the difference in prices between when Jhunjhunwala’s name first appears as a shareholder in public disclosures to the point at which it is no longer present. Smaller holdings for which disclosures have not been made are excluded.

Jhunjhunwala held his stake in 44 companies for at least two years. This is more than half the companies under consideration. This is an interesting contrast to Warren Buffett, CEO of Berkshire Hathaway Inc. and one of the world’s richest investors, with whom Jhunjhunwala is often compared.

Buffet is known for holding some large bets for many years. However, researchers who examined his periodic disclosures from 1980 to 2006 discovered that he held most of his stocks for approximately a year. He held his stake in only a fifth of the companies for at least two years, according to the study entitled Overconfidence, Under-Reaction, and Warren Buffett’s Investments by John S. Hughes and Jing Liu from the UCLA Anderson School of Management, along with Mingshan Zhang of the Hong Kong University of Science and Technology.

One must keep in mind that the study looked at Buffet’s entire portfolio, while we have access only to Jhunjhunwala’s publicly disclosed bets, which are probably only his large, long-term bets.

Jhunjhunwala’s three biggest publicly disclosed bets are all more than 10 years old. This includes Titan (Rs.2,720 crore), Lupin (Rs.1,270 crore) and Crisil (Rs.789 crore). This accounts for more than half of his declared portfolio of Rs.8,663.33 crore, according to September quarter-end disclosures. His top sectoral bets include pharmaceuticals, information technology and computer-related companies, construction and auto and auto ancillaries in the September quarter.

Tadit Kundu, Ashwin Ramarathinam and Ravindra Sonavane contributed to this story.

Wizards of Dalal Street 2015 - Durgesh Shah Part I

http://www.moneycontrol.com/news/market-outlook/why-durgesh-shah-believes-knowledge-is-over-ratedmkts_3953801.html

Why Durgesh Shah believes knowledge is over-rated in mkts

The two most important traits required to become a successful investor are temperament, followed by experience, says Durgesh Shah, director of Corporate Database, and governing body member of Flame University.

In an interview with CNBC-TV18's Ramesh Damani for his series Wizards of Dalal Street, Shah was discussing the virtues required to become a successful investor.

"Markets are a subset of nature. In markets, as in nature, you have to be humble or you will be humiliated," he says. "Those who do well in the markets say that they realize how little they know. Also, when they do well, they know how much of the result was because of luck and how much was skill."

Shah managed the institutional desk at investment bank ENAM before setting up Corporate Database, and rubs shoulders with market veterans Nemish Shah, Vallabh Bhanshali and Manish Chokhani (all of whom are associated with Flame).

In the interview, Shah espoused the idea that knowledge is over-rated in financial markets, echoing legendary investor Charlie Munger's advice [as well as that of his famous partner Warren Buffett], who rates temperament above virtues such as intelligence or knowledge.

He elucidated this with the example of a "large investor" -- pointing to big bull Rakesh Jhunjhunwala -- who a few years ago took a large position in oil refinery HPCL.

"His knowledge about the company was not a fraction of most analysts who track the company. But he had the courage and temperament [to understand the opportunity arising out of the oil slump and deregulation]," he said. "The brokerages will carry out the stock's brokerage but he will make the money."

Ramesh Damani: Buddhism has a saying, “There is no wealth like knowledge, there is no poverty like ignorance.” Today, we begin an extraordinary three-part series, the ‘Wizards of Dalal Street 35 years", by asking the question, “Are great investors born or can they be taught?”

Below is the transcript of Durgesh Shah's interview.

Q: We are sitting at the seat of great learning that FLAME University hopes to become. Let us learn about markets. I talked to Sunil Singhania just a few episodes earlier and he said that he felt like a zebra in Lion country, meaning that nature taught him a lot about markets. You also believe that markets are essentially a subset of nature, do you not?

A: Very clearly, the laws of the markets, you will understand very easily if you understand the laws of the nature. Or the other way, if you understand the laws of nature, you will clearly start beginning to. To start with, Raag and Dwesh is the commonality in nature. You conquer that and you become a person who knows yourself.

Q: Raag meaning attachment and Dwesh meaning hatred?

A: Exactly! Same thing in the markets, you just need to conquer greed and fear. And you are there. Half the battle is won.

Q: Between say temperament, knowledge and experience, what is most important thing for a good investor to have?

A: I would think it is obviously, temperament first, experience thereafter and knowledge.

Q: That is surprising. Everyone says knowledge is all important.

A: I agree with you. In fact, the problem is it is over-rated. Any child is told that go and do engineering degree, go to an MBA school and then you will be all set to become a good investor. However, if you go down to see corporate performance or performance in the stock market with relationship to knowledge and temperament, let us take the example of HPCL. We all know a large investor, proprietary investor took a large position a few years ago, I am very sure that he knows less about Hindustan Petroleum than most analysts who cover the company on the street. However, at a certain point in time, the basic understanding that at this price there is enough he knows for him to buy the stock. There was a complete disbelief in a public sector undertaking (PSU) in the fact that this was a company which was going to get eaten up by the new private entrants. The subsidies of the government, the cash flow issues.

Q: The wisdom was knowing the difference between an HPCL and an MTNL.

A: Exactly. He knew what he needs to know of buying this at this price he can't lose money. How much he would make, how much how soon will make, may probably not have been important. And that is clearly the important thing.

You mentioned about Buddha talking about knowledge. In one of his sermons, Buddha mentions that whatever I am talking to you is like a handful of leaves compared to my knowledge which is the whole of this forest. The fact is you only need to know that much. For salvation in the real world or when it comes to market, to know that this is what you need to know and then go out and act more than doing analysis paralysis beyond a point.

Q: Markets are not just about ratios and cash flows, they are also about psychology and greed and fear and history and geography?

A: I agree completely that FLAME is a school of liberal arts and investing is the ultimate liberal art. You need to know enough about economics but without psychology economics is incomplete. You need to know about history, you need to know about geography, communications all of it.

Q: You need to know about history because the pendulum always swings. Whether it is in history empires are born, become great, fall. So do stocks, so do companies, so do investors.

A: Cycles very clearly. In fact the interesting part of the markets is that corporate performance also moves in pendulums like we talk about cycles everywhere but that pendulum movement is not that large. Cyclical companies are a little wider, but corporate performance or the stock market performance will clearly go much beyond the pendulum swings of corporate performance.

Q: Price discounts everything but give me an example of a second level thinking that you have seen in your career?

A: The best example would be 1988 starting with the Madhu Dandavate Budget who was considered to be a socialist going on to the assassination of Rajiv Gandhi, going up to a situation where literally the country had to pledge gold to get foreign exchange. All the Gulf War, all the things that the world saw were going wrong for India. There were these few guys on Dalal Street who had the faith. The way things are going wrong this will only get better for the investor, the country will move in its behaviour from a pendulum to do things which it should have done any way and rest is history. The Sensex went up from 380 in 1988 to 4,500 in April 1992.

Q: But here is the question I want to ask you. The first level thinking; bad headlines, so the market would be bad, sell. What does the second level thinking do?

A: It goes on to think that okay, whatever is in the news is it discounted in the price and can all these people who are rushing out finally realise that enough is enough. So, the pendulum will surely at some point have to come back and rarely the pendulum comes back to fair price and stops. You are going to get a swing which is positive and that is something that most of these guys got it right that it is under priced and it won't come back to fair price. It is going to overprice zone.

Q: Which we saw on April 2, 1992 at 4500.

A: That was clearly the first large phase of wealth creation for a lot of Indians after independence.

Q: A lot of young kids who come to the market want to understand speculation better, investing better. What are the differences and what path should they choose?

A: I guess there is no question that speculation is extremely risky. Let us define speculation clearly as taking positions where either you make a huge amount of money on change networth with orbits or you are going to lose your shirt.

Q: Binary, zero, one?

A: Binary, clearly, zero, one. In investing, it is much different. You have enough room to make mistakes and still come out quite well-off. Investing I would say is much easier than speculation.

Q: Would you rather be a wicket keeper though? Watching the flow of the game and then hitting a strike-out when you see the opportunity or taking a catch when you see it? Is that the role you see for yourself?

A: I clearly feel that if you are going to be in the game, you have to be in a position where you can see the game being played out and see the best players. Fortunately for me, I had the best seat in the show from 1980 onwards. I have seen great players, not only play extremely well, but kind enough to share their techniques of everything they did with what is going on.

Q: Yes, of course, that is important, but is that the seamless web of trust that you talk about so often, that the like-minded people actually help each other in the markets.

A: I think it is the seamless web of trust of life, whether you are talking about a doctor or a lawyer or an accountant. But, this entire business of relationships, you need to identify people who you think have the potential to get into a positive relationship.

Soon, you find a bunch of people who all are willing to forget as soon as they give and the guy who takes it, remembers for the rest of his life. You have people who are making a mistake and acknowledging it as soon as they realise and the person who is impacted has forgiven even before the person is apologising. So, these relationships can be far and few. I guess I was blessed to have a lot of them.

Whenever, you find those kind of people, you need to make sure that you cherish those.

Q: But, the underlying theme is that when you create this web of trust in the market, you share a philosophy, you do not necessarily share a portfolio.

A: That is something again, that most people do not understand. Very few people believe that Radhakishan Damani and Rakesh Jhunjhunwala have a very small sub-set of common stocks. This is where the whole thing comes in. The faith and respect admiration for each other is much beyond ideas. Everyone has their own ideas, everyone is using the other guy as a bouncing board for finding loopholes on whatever they are thinking but they are quite clear and humble to accept that just because I like a certain stock, does not mean that you should be buying it.

Q: But then what is the philosophy that binds them? What are the common threads in their friendship or their approach that binds them?

A: I guess they have seen each other’s values over a long-period of time and whether it is markets or life, just come to think of it. How many guys do you know whom you would be willing to make an executor to a will? So, there are certain qualities that you believe that some people have seen through times and their behaviour makes you feel that when somebody is putting trust on to you, you know it is a burden, but you are willing to take that and deliver because you know there is a reciprocation from the other side. In more such relationships, the person feels obliged to be a part of the group or a part of the relationship rather than the other way around.

Q: You were talking about speculation and investing as being two different disciplines and I wanted to touch some more on that point. Do you find people can segregate the two, is it easy to segregate speculation and investing?

A: If you can do one well, that is good enough for a lifetime, but there are a few people who proved they have done both very well. That I think is very unique. Somebody is trying it he better be forewarned.

Q: What are the different skill sets here?

A: For example, as an investor, you are buying something where timing is not important, where the fundamentals are important. You know what is going to happen, but you do not know when.

Q: And if it goes down, you buy more?

A: Exactly. You were waiting for it to go down to add, whereas, when you are trading, it is exactly the opposite. The stock you buy, timing is the most important thing. The direction is very important. You keep buying more as it goes up and you keep selling out as it goes down. In fact, most people do not understand 'Buy as it keeps going up and sell as it keeps going down', it is something that outsiders that just do not figure out. Most people will not understand, but that is what traders do.

Q: It is counter-intuitive.

A: It is very counter-intuitive and for a fund person to have both those skills is like having a Chinese war in your mind. I cannot think of it.

Q: But you have seen it.

A: I have seen people do it, deliver unreal returns on both.

Q: But very few.

A: Very, very few and I would say that these are clearly prodigies.

Q: Picasos and Rembrandts.

A: Very clearly and I think anyone who is trying to do that should be extremely careful.

Q: When you do speculation or satta. ‘Satta hamesha apna slip book se hota hai, cheque book se nahi hota hai.’ What does that mean?

A: There are many rules which other people are not able to understand. Very simply they say that 'satte ka nafa hajam karna, charas aur gaanje se jyada mushkil hai'. So, the fact is most people cannot understand why it is difficult, but it is a matter of an intoxication. The person starts believing that he is much sharper than the markets and that is all that the markets wait. It gives you the gain and then gives you real pain.

Q: Takes it away.

A: Takes it away with a vengeance.

Q: So, the opinion that you can throw your cheque book and get a speculative position to be bullish is foolhardy at best?

A: Because, that is what most investors do. You set out and try to place a dollar assuming that this would be worth much more than what you are paying over time. But in speculation, it is exactly the opposite. The more you are going to put in is more going to be at risk. Nobody can afford to do that. There is no way, in fact, the richer you are, the more difficult it is going to be right on speculation.

Q: One of the greats, which you mentioned, RK Damani, once told me that if you want to create an enemy in life, teach your son how to speculate or tell your son how to speculate.

A: Socrates was a Jew and he said that all Jews are liars. So, Radhakishan Damani does it extremely well and then tells you not to. But he realises that it was extremely difficult, he realises there were points in time where he could have gone seriously wrong and history would have been different and so he is humble enough to tell you that this is not easy, do not try it.

Q: Let us talk about money. You mentioned money and money is what Dalal Street is somewhat about. The great ones use money to keep score?

A: Very clearly. As a matter of fact, you will see that most investors, value investors in particular, they are so innate in their nature of frugality that forget being a spend thrift, they will never be able to do things that sometimes, when they do it, they feel they are a victim of their own image and they have to do it just because the rest of society is doing it.

Q: So, the better house or better car is against the grain?

A: It does not matter to them at all. I do not think the bother about it. Jim Rogers used to say that I told my wife that why buy a sofa set, we buy a stock and then we will buy something bigger. These guys will think that instead of buying a house, why not rent out something and that is cheaper.

Q: Never buy depreciating assets. Keep your focus on appreciating assets?

A: Very clearly they would think about that even when they are buying antiques or paintings.

Q: But when you have this kind of money that the market affords you, you have been though 3-4 bull-markets, what do you do with that money? If it is just a measure keeping score, what is the second step with that money?

A: Sooner or later, in the Indian philosophy also, we consider that donations is an English word. It is a part of your moral obligation to give back.

Q: Philanthropy?

A: Now, as I said earlier, it will come naturally to you that instead of spending it on yourself, you want a higher return on investment and you feel that philanthropy gives you a higher return on investment. It will come down very naturally to you to go and give it to people who are more deserving, underprivileged and that will come very naturally to any value investor.

Q: In fact it is success in that money creates a humbleness or a gratitude inside you?

A: Like we talked about nature, the more they acquire, the more they bow down.

Q: The more the fruits in the tree, the more it bows down.

A: Exactly, they realise very clearly that many a times, they were right for different reasons, not for their smartness. The more they realise this, the more they are feeling humbled by the fact the world is acknowledging their skill while they were lucky at times. These are the guys who realise that Narayan Murthy was the horse who drew the cart and they were dogs walking beneath it. And they just made the right call of which cart to follow.

Q: That is the wisdom that they have bought into.

A: That is the thing that makes a difference. There are a huge flood of people on Dalal Street who think being the dog following the cart or walking under the cart think they are the ones that carried the burden of the cart.

Q: I think Carl Wright was ambassador to India during the Kennedy administration who said it best that everyone thinks he is a genius in a bull market. We know better now.

A: Very clearly, most people overrate their skill and underplay their luck.

Wizards of Dalal Street 2015 - Sankaran Naren

http://www.moneycontrol.com/news/mf-interview/wizardd-st-s-narens-checklist-for-winningstocks_3710101.html

In 2009, as markets around the world were breaking down, Sankaran Naren, one of India's top fund managers came across The Checklist Manifesto, a bestselling book by doctor-writer Atul Gawande. The book deals with the simple yet powerful concept of the utility of creating check-lists -- it has achieved widespread practice in fields from medicine to aviation -- in order to reduce mistakes. Naren then went on to create a similar checklist that encapsulated the key points of his own investing framework. In an interview with value investor Ramesh Damani for his CNBC-TV18 seriesWizards of Dalal Street, he outlined the three key criteria underpinning his market philosophy: pay close attention to fear, valuations and flows. The checklist helps Naren, chief investment officer at ICICI Prudential AMC, reinforce his rules when emotion is ruling high in equities and helps him take a contrarian approach to investing. For instance, earlier this year, metals firm Glencore lost about 90 percent of its value in London, following the commodity rout. "It was led by smart people, had cash and was certainly not the worst in the world," he said. "That was the lemon moment. But for you to gather the guts to look at metals as a sector. But in the 15 days that followed that day [when Glencore hit a low], some metal stocks in India rallied 40-50 percent." During times of bull market peaks, he keeps a market capitalization rule that comes in handy. "In early 2008, the mcap of some property stocks was more than the entire pharma industry and of some power stocks more than the FMCG pack," he pointed out. Below is the verbatim transcript of S Naren’s interview with Ramesh Damani. Q: Aviation, medicine, stock picking, disparate disciplines, but something ties them together, doesn't it? A: If you at it in aviation it is completely prevented accidents. In medicine it has reduced the number of mistakes and that the same thing holds good for investment because in investing also if you reduce the number of mistakes you can make a lot of money. Q: How did you come up with this checklist theory of yours? A: Actually as part of our work we try to read books and there was a very nice book written by a person called Dr Atul Gawande called The Checklist Manifesto. It was a fascinating book because it was written by a doctor and there was a lot of reference to investing. That got me interested. Q: Atul writes that, okay, you clean your hands for example, you have better outcomes in surgery or you use Quinine and you can cure Malaria for example. Markets are more nebulous, aren't they? A: Markets are nebulous in the short run and there is clearly emotions which play a role but there is a history to market. You will see that there have been in crisis, there have been euphorias, there have been bubbles. So, what happens, if you look at the 11 years that I spent in mutual funds we have seen all kinds of market. You get a good grip if you use checklist on where you are in the cycle. For example you know when you are in euphoria, you know when you are in fear, you know that at points of time that you are in bubble. Q: What is the checklist for putting money in equities?  A: In equities if you ask me, there are three things which matter; whether there is fear, how is the valuation and third is what is the flows. For example, whenever Foreign Institutional Investors (FIIs) sell, you have to put money in equities, because fear is rising. In fact they looked at the last 20 years and found that whenever FIIs have sold aggressively, like 1998, 2002, 2008, 2011 and recently in August-September 2015, those fire opportunities to invest. But if you did not have a checklist you would be wondering what would happen tomorrow, because every day you are worried what is happening in China, what is happening in emerging markets, but actually our checklist gives us the confidence to say it is time to put my money today. Q: If checklist was all there was to your investment process, a database specialist would be a great stock picker but clearly that is not true. A: That is why even if you make use of checklist, it does not ensure complete elimination of mistakes. It is not like in the airline industry where you can not have any accidents. You do make mistakes because markets behave differently, people in the markets behave differently, so it only reduces the number of mistakes. But once you reduce the number of mistakes, you are on a good wicket in the market over a long period of time. Q: You met Atul Gawande. What did he explain to you about the checklist process? A: He actually is a medical doctor and as a medical doctor he was telling us how beautifully using checklist reduce the number of mistakes in the operation theatre and he found there a lot of people like Mohnish Pabrai and others who use this checklist, what he wrote about medicine into investing and then he finally wrote the book. Q: Give me an example in life where in your career a checklist has actually helped you. A: Clearly if you ask me, you can see a bubble, for example if you look at a situation of fear, take metals for example in August-September in 2015, at that point of time, the key characteristic is fear. You have a company called Glencore Xstrata, which is listed in London, is down 90 percent and then you go and look at the company, it is led by smart people, has cash, it has not been the worst company in the world, so if you look at that day, you can clearly see that that is what I call almost like a lemon moment in metal. So for that day for you to gather the guts for you to look at metals as a sector and tell the external world that metals looks like a good pick was such a difficult thing and I couldn't believe when the 15 days which followed that day certain metal stocks in India gave 40 percent. Q: Lots of periods in last 10 years, India is a very volatile market where you had fear and greed in equal measures. August 2013 the new Modi bull market, the Modi's election has the checklist helped you through all these situations? A: Clearly we started learning about it only after the 2008 crash. So, till August 2013 as a house we were telling people to invest in our US bluechip fund because their checklist told us that till the current account deficit came down the US market would be more interesting to Indian investors because of the situation that dollar could keep appreciating against rupee. However, once the current account deficit came down in August-September 2013 we actually stopped marketing our US fund and we actually got the opportunity to look at investing into domestic closed ended funds and we launched some of them. Q: How does Naren a Mechanical Engineer become interested in the stock market?  A: There is a long history to it. My mother passed away when I was 14 and I didn't have any brothers and sisters. My father used to have the habit of investing in public issues in 70s and 80s and that made him pretty interested and therefore he educated me right at the beginning which I am talking about in 80s in Chennai on the merits of equity investing. Q: Let us move on to contrarianism which is the hallmark of your investing style. First let me ask you a question. Have you used WhatsApp? A: Yes. Q: Jan Koum was the guy who designed WhatsApp and he claims that he designed it because he wanted to call his father in the Ukraine and did not have the money to make the call and spawned a USD 20 billion empire as a result of that, that is his story. What is your story about contrarianism? How did you get into that? A: In 1989, when I passed out of IIM, I started looking at the secondary market and I had an absolutely phenomenal investing experience between 1989 and 1994. Q: Everyone is a genius in a bull market, we had a great bull market at that time. A: So I was a genius growth investor who could make huge money, who could think of good ideas which were multi baggers. You know I always believed that by being an Mater of Business Administration (MBA) degree holder who knew how to look at an annual report, I had information arbitrage and I could make money off it. That I would make money so quickly in that boom was not something known to me, but when I made it, obviously you get drunk and then you make mistakes. Q: What was that mistake? A: The mistake was I thought that the foreign investors were very smart. There were a number of companies in 1994 like Natural Energy Processing Company Limited (NEPC), Southern Petrochemical Industries Corporation Ltd (SPIC), many of these companies they did Global Depository Receipt (GDR) issues. Q: A dishonour list, if you will sometimes. A: I do not want to mention that. I thought that I was buying some of these stocks at one-third the GDR price and I felt I am investing much better than their foreign investor who invested at three times the price, then after that I lost 90 percent and here I was in 1997, not knowing after the Asian financial crisis why I lost so much of money after being so smart? So that led us to a team of friends who had all made the same mistakes. Q: The team of friends were a group of fellow investors in Chennai, right? That influenced you a lot. Just tell me a little bit about that. A: Yes, actually that group you know were all people who needed, in those days I would call psychiatric help, because all of us had lost money in the 1994-1997 period. So we all needed support to know what mistake we made and looking for answers. So we got into this group. When we entered this group and then went about the process, we realized that you cannot be a momentum investor in the long run to make money. You need to know when to buy and you need to know when to sell and most of the time when you want to sell, the others should be interested in buying and you should be interested in not buying. So, that is how the whole concept of I would say contrarian thinking came and for which our first experience was in 1999-2000, the tech bubble when we saw stocks like Global Tele, DSQ software, Penton Media. Q: They went to stratospheric heights, they were the most celebrated stocks. A: And we had to avoid them and most people around us said, these people have more than 10 years of experience in equities and they are saying these companies are useless, we are making money. But contrarian investing that we have to look at the stock and come to a conclusion, we were negative on many of them. So contrarian investing helped us to stay solvent. First, we were considered irrational in 1999-2000, we did not get it and then we realized that we were solvent when the others became insolvent in 2001-2002. Q: But it is painful to hold through that kind of a bubble rise. Being a contrarian investor Buffett was one at that time and every day the stocks rise and your stocks fall. So, how do you handle that intellectually? A: It is very easy when you are managing your own money, but in 2007 I was running funds which many of them underperformed the benchmark in 2007. Out of the same streak of what I call contrarian investment and when you are handling other people's money and you are underperforming benchmark people came to me and said you are running value discovery but why are you not able to beat the benchmark and I said the contrarian investing style and whatever I had learnt in investing over 17 years told me that you have to be careful and I am going the infra names although I was running the infra fund then. Q: But when you do contrarian investing, it is not just about being different from the crowd, you want to find triggers for a change, right? So, how do you assess the sector that you like? A: Sometimes the triggers in 2007 frankly we never knew there was a global financial crisis coming in and towards the end of 2007 as the markets kept going up we didn't know what that trigger would be. But our 1999-2000 hat definitely told me that something will happen. When will it happen I don't know but 1999-2000 told me that it will happen and you won't know the reason. Q: You look for anecdotal reasons that the public starts coming to the market, people talk nonsense, is that some of the checklist of a bear market? A: Clearly off bull market. In that period I had analysts coming into my room and telling me the stock looks very cheap on 2014 earnings. Q: In 2008, that triggers a bell. A: That clearly triggered a bell and market caps in that period there were market caps which were astounding. If you look at some of the companies then like some of the real estate companies were higher than the entire pharma sector. Q: A power company was bigger than the entire FMCG basket I remember. A: Correct. So, those market caps don't lie. Earnings can go up cyclically, it can come down cyclically but market caps gave me the best reasons to stay rational but it was tough.

Q: Let us talk about value investing, growth investing, value investing are they two different species?

A: Warren Buffett says it is joined at the hip. It is not like it is zero, one. Q: Indian naturally favour value investing as a cultural ethos? A: I have been surprised to know that Indians favour value investing in everything other than investing in stock markets. When it comes to sale of Amazon's or Flipkart's of the world they believe in value investing. Q: We want a cheap shirt but not a cheap stock? A: Yes, that is clear. Q: How do you distinguish between a value stock and a value trap? A: Intrinsically I think Indians are not value investors. They have to go through a cycle to become value investors. You don't start being a value investor on day one. I have a team of colleagues, many of them young and many of them will question me on many of my value investing stocks. I find that conversation with them has really helped to me avoid many value traps. Q: Give me an example of a value trap that you avoided? How about the PSU banks which were the favoured sector in the market but you avoided them. A: In 2008 due to what happened in the global financial crisis money went to public banks all over the world. That was a very interesting period where what you saw that in a sector where both private sector and public sector is there, the public sector gained in the year 2008 across the world. So, people got into this perception that what as true in other sectors where private sector gains would not happen in banking. Whereas if you looked at the entire process, you knew that was a one time event out of GFC. Q: Your checklist told you that problem is there in the credit cycle? A: Yes. That is why from then on it was pretty easy to know that private banks would gain at the expense of public sector banks. Also 2008 proved  that banking was a more unsafe sector from an equity investor point of view and you had to do your rigorous work than any other sector because of the persons whom I used to watch the Legg Mason Value Fund of Bill Miller, his fund got destroyed in 2008. Q: He just got a whole bunch of wrong stocks. A: Yes because he had 38 percent weightage in financials. That combination I realised that you have to be very careful in leverage sectors. Q: That is after 20 years of outperforming the S&P continuously almost, the man went overweight and got a divorce.  A: Yes.    Q: You have a reputation in industry of not being afraid to trade your stocks. A: Sometimes you do it but for example in 2012-13 for almost two years now I have been underweight some of the quality stocks and quality stocks have continued to do well. However what I find is with this whole world of passive investing which has come in the rest of the world there are opportunities which come due to induction of stocks into some index, dropping of stocks from index and those give me very good arbitrage opportunities. Q: Other than your famous checklist, the famous contrarianism, what else do you look at? You have often said that current account deficit is something you pay a lot of importance to. A: I do pay a importance to many factors. I believe that if you see capital being allocated well in a country or in a company, you tend to make money. So, you always look at how capital is allocated. If you feel capital is allocated well you tend to make money and that is true of a country also. If you see why India is one of the better equity opportunities is because there as a country we have allocated capital much better than some of the other countries which may have grown faster but have not allocated capital well. Q: You are referring to China perhaps. Summarise for me what is S Naren's investing philosophy? A: I would say that look for opportunities in fear, look for opportunities in greed and communicate. ICICI brand has given me the opportunity to communicate to the country and use this opportunity to make equities a good asset class for the entire country, educate people. I have been in equity markets form 1989 but the average investor has not managed to make the money that the markets have given him. Q: People fail to understand that index in 1980 was 100, it is closer to 30000 now, 300X move has been made and if your wealth hasn’t multiplied by that amount you have been doing disservice to your portfolios? A: Absolutely. I think the entire savings market through the mutual fund industry  is a beautiful opportunity for an investor and that is my main hope that we will try to increase assets that we can collect from investors and make money for them in the long run. Q: I have a checklist of rapid fire round with you. You enjoyed your education the most where - IIT or IIM? A: IIM. Q: Would you prefer on a Sunday playing Bridge with your friends in Chennai or listen to Carnatic music? A: Listen to Carnatic music and playing Bridge together. Q: Are you an early riser or late sleeper? A: Early riser. Q: Tea or Coffee? A: Coffee. Q: Your favourite city in India? A: Chennai. :-) Q: If you had a choice of dinner with Atul Gawande or James Montier what would you pick? A: Having met Atul Gawande this time it would me James Montier. Q: Sensex 50000 by? A: I can't predict and I don't believe that you can forecast so accurately. Q: Your favourite ratio when you read a balance sheet? A: Price to earnings (PE) ratio. Q: An Indian investor that you admire the most? A: Nimesh Shah. Q: An Indian CEO that you have admired the most?     A: I think right now it is N Chandrasekaran. Q: A stock pick that you are most proud of? A: LMW in 1989. Q: Your dumbest stock pick to date?  A: It has been textile companies and spending lot of time on many textile companies. Q: Name the one thing that keeps you up at night? A: I think the responsibility of managing our public money. Q: One contrarian theme that you are focusing on right now? A: Last few months it has been metals and oil and gas. Damani: What you have said is that what is comfortable is really profitable but in the last 30 minutes you have not only given us comfort but also some profitable ideas how to invest your money.