In India, while choosing stock, just worry about the integrity: Raamdeo Agrawal
I have gone repeatedly wrong in assessing the integrity of the management.
Can you build a portfolio with only quality companies?
Defining quality is not difficult, the point is how do you build a reasonable portfolio with only quality companies. That is the big challenge. That challenge is there with all my managers. But in buy and hold strategy, what happens is that some portion of the portfolio will definitely look expensive because the market is also at 25 PE multiple, the Nifty at 26 PE multiple… Nifty is not that cheap. You can be only relative to the market.
If you use only the PE multiple as a measure of valuation, then clearly you are at a slightly expensive market right now. Your portfolio will also look expensive. How do you find the incremental ideas and particularly if you are trading a lot, 30-40-50-60%, then it becomes very difficult to find enough enough good ideas at a reasonable price.
But if you are looking for one or two ideas in a year, it is not impossible, it is difficult but it is definitely not impossible to find one or two ideas. What happens is that you may have the conviction, but the market does not have conviction. So the multiples are crashing and yet the quality is there. There are the kind of opportunities. In HPCL and BPCL we made tremendous amounts of money on the way up. Then in the entire auto pack, in the last 18-20 months, there are quality companies – Eicher, Maruti -- where we lost almost 30-40% market cap, but the quality was not an issue.
It was just the price collapse and the same set of stocks are doing very well right now. The portfolios are a mix of good companies, a little expensive. But some of the companies which are suffering also and some ideas will come which will be hopefully reasonable.
How do you assess the quality of management or how do you start making a firm opinion of the management tracking the data which they release every quarter over years? Maybe give examples of some of the managements you have formed an opinion about over years.
We go wrong in assessing quality because the tabled research is on the profitability part of it or the quality of business. But I have gone repeatedly wrong in assessing the integrity of the management. Buffett says you got to look at three things in management – one, competencem that is he good in what business he is doing; second, does he have energy and passion to take it forward; does he want to make it 10x, 100x, 1000x? And third, check the integrity. If there is no integrity, there is no point in having the first two.
In India, you have to just reverse the process. First go and check the integrity because in India, everybody is coming as a first generation entrepreneurs. They are all bhookhas (hungry) and they have unlimited energy. They have competence and that is why they are in the business. It is a highly competitive market. So you do not worry about the competence and passion, just worry about the integrity. Very few will clear that check.
So you have to check the integrity and many times what happens is like more recent examples like say Manpasand, despite framework and everything, we hit a hundred to zero kind of a situation. So we got lured by the consumer opportunity in that space and we thought that we will be able to pass through and we knew that it is not a pristine management. Now what I am realising is that the moment you realise that it is not pristine management. Howsoever opportunity is there multibagging, this, that. Just run from there. I mean earlier in Financial Technologies, I burnt myself. Once bitten and yet I went the second time. This lure for fast growing consumer space is there as the growth is big.
But learning from some of your failures, there cannot be better examples than you….
I am living through this and that is why I am giving you absolutely straight what is hurting me today. I am not mincing words. I am telling you what really happened. So, it is integrity and what happens is it is not that you know that he is Narayana Murthy aasia nahi hua ki bhai hum soche Narayana Murthy aur nikla koi gadha, aaisa nahi hai. So we knew right from the beginning. But somebody is doing thousand crores of Mangola and he is saying that I will spread Mangola all over the country. If you can do Rs 3,000-4,000 crore worth of mango SIP or whatever, you will become brand in any case.
Is behavioural indication of finances any benchmark?
See inspired by my mistakes, I am doing this wealth creation study. One of the things which is very ignored and very well practiced in America by the big guys like Buffett and all is the culture check. When we hire an employee, we do a culture check -- whether your culture will fit into my organisation because it is like figuring out whether the soil is good enough for the new plant you are planting. So the plant must be very healthy but if the soil is not good, it will not work for the plant. The same goes for the employee.
But in buying the stocks we do not do deeper culture check, which is even more abstract than figuring out the qualities of management. But the deep investors and very long-term large investors look at the culture. So culture check is extremely important. We will publish the paper in the next one, one and a half months, it will be very interesting.
If we had gone back into the culture of understanding how he has evolved, pehle kitne badmaashi kiye hain, pehle kitne law suits hua hei, (If we had checked his past, seen whether there have been lawsuits) we would have been better off. That is the first part of it.
In the last one and a half years of correction, veterans with 20-30 years experience got shaken. We heard some of the comments coming from you as well. How shaken were you?
I feel pain only for the clients because clients come in big hordes only at the end, at the top of the market, when already the stock has gone up from Rs 10 to Rs 30. Now most of the money has come between Rs 25 and 30 and now when the markets correct to say 20 from 30, it comes down to 20 or 22, all of them are in losses. See when we went and sold, everybody asked what do you expect of the market or what will happen to this product which I am buying? What do we say; expect doubler in five years.
This happened when I went to Ahmadabad one of the distributors sais sir aapne bola tha paanch saal me double hoga, teen saal mein to abhi utna ke utna hi khad hua hai (You had said it will double in 5 years. Three years down, it is at the same place). Do you think that in the next two years, it will double? Now sitting before 30-40 guys you have to find a nice answer; I said I am not guaranteeing again for two years, but the next five years it will again double. So again he is in the hook and he gives me money.