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The biggest red flag in a company is a promoter who does not want to delegate, according to the late Rakesh Jhujhunwala.
In a talk given in 2013 to the students of FLAME University, the Big Bull of India said that investors should look carefully at the promoters and management of the company. “If the promoter signs off on anything, with his ego getting in the way (then that should set off an alarm),” he said.
Later expanding on the importance of having the right people at the helm, he said, “You must check if the management is a wealth creator or a profit creator, the difference is very, very important.”
Management quality was among the seven factors—others being addressable opportunity, competitive ability, scalability, operating leverage, management quality and valuation—that an investor should consider, according to him.
Jhunjhunwala, who passed away in August 2022 from a cardiac arrest, had a few rules in investing and they leaned pretty heavily on the qualitative aspects of a company.
“You must look at the drivers of earnings and valuation, rather than the earnings and valuation by themselves,” he said.
Also Read: Bull in the English pub: How Rakesh Jhunjhunwala unwound after a long day
“Look at what is driving the profits, rather than trying to predict the profits,” he elaborated, adding that qualitative analysis was far more important than quantitative analysis.
Some of the quantitative parameters to check, according to him, included dividend payouts, return ratios (RoI+ RoE), cashflows (OCF+FCF), which he said are key to identify a value accretive company.
Another of his investing fundas was to look at the bigger picture. “Make it (investing) an act of wisdom, not an act of intelligence,” he elaborated.
Jhunjhunwala related an incident to elaborate another lesson he had to impart on investing. It was from one of his days at Geoffrey’s bar, where people heckled him for stock tips. Usually he shooed such requests away, wanting to relax with a drink. But one time, he did give a tip for a stock that was trading at Rs 70, when the person asked how far it would go. Jhunjhunwala said it may go to Rs 150 in three or four years and the person was unimpressed.
“I told him, here’s the address to Racecourse Road,” replied Jhunjhunwala.
To the students, he added, “If I make 18 percent from my portfolio, I think I am a king. If I make 25 percent, I think I am an emperor… expect a realistic return (from investing), balance greed and fear.”
He asked students “never to forget the four-letter word: R-I-S-K”.
He said that investors need to be both disciplined and flexible. For the first, have a game plan. For the second, remember that “investing is always in the realm of possibilities”.
Jhunjhunwala warned against being contrarian for the sake of it. But, at the same time, he asked them not to rule out contrarian views entirely. As he had said, be flexible.
In the end, he insisted that they have conviction and be patient. “Your patience may be tested but your conviction will be rewarded,” he said.
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