Rakesh Jhunjhunwala‘s tips on investment techniques

ASSET ALLOCATION & COMPOUNDING

The primary factor that Rakesh Jhunjhunwala emphasis is that one should bear in mind the importance of ASSET ALLOCATION and the power of COMPOUNDING.  

Rakesh Jhunjhunwala says that Asset Allocation means that you must be clear in your mind how much money you can spare for your equity investments.

Rakesh Jhunjhunwala emphasizes that the necessity for asset allocations stems from two realities of equities that every investor must be conscious of:

(i) Equity investments are very risky as compared to other asset classes in the short to medium term;

(ii) Equity investments take a long time to deliver results.

Rakesh Jhunjhunwala says that as an investor, you must ensure that the money that you invest in equities are not coming out of the moneys that you have kept aside for necessities and emergenicies.

Rakesh Jhunjhunwala says that you must ensure that a sufficient amount of money is always kept handy and out of the stock market (in debt investments) for meeting expenses on medical care, education, marriage and other unavoidable necessities.

Rakesh Jhunjhunwala says that it only the money remaining after this ASSET ALLOCATION that you must invest in shares.  

Rakesh Jhunjhunwala says that you must also bear in mind your age, your income-earning capacity and your risk-taking ability – also dependent on the number of dependents that you have and their short / medium-term requirements.

Rakesh Jhunjhunwala‘s point about compounding follows logically from the first point. If you are comfortable with letting the money rest in equities for a medium / short period of time, the magic of compounding works by itself.

In one of his presentations, Rakesh Jhunjhunwala showed this table of the magic of compounding.

Rakesh Jhunjhunwala's astonishing compounding example

What this astonishing presentation of Rakesh Jhunjhunwala shows is how if money is allowed to quietly compound, it attains enormous proportions. See how a paltry sum of Rs. 1 lakh per annum over a period of 25 years at a rate of return of 25% becomes an incredible Rs. 2.64 crores.

Imagine if you could save 10 lakhs every year, in 25 years you would have 26 crores, says Rakesh Jhunjhunwala!!

That is the simple but incredible clarity of thinking that Rakesh Jhunjhunwala‘s mind has.

CONVICTION

Rakesh Jhunjhunwala‘s second mantra is that you must have CONVICTION in what you are doing. You must feel it deep in your bones that equities are the way for you. You must be comfortable with the idea that your investments are subject to the vagaries of the market and you must not get sleepless night worrying about your investments.

If you think about it, this mantra is a logical corollary to Rakesh Jhunjhunwala‘s first mantra about Asset Allocation. Your comfort level with equities is directly proportional to the correctness of your asset allocation. If you have correctly kept away from equities the moneys that you need for emergencies and necessities and have only invested long-term funds in the sstock market, you will have no tension only says Rakesh Jhunjhunwala!!

DON’T BE RIGID

Rakesh Jhunjhunwala‘s third mantra is that you must be open to accepting that you have made mistakes. Don’t be rigid or obstinate. Keep an open mind!

Rakesh Jhunjhunwala  says that before buying a share, make sure that you have done proper research and identified all the positives and negatives of the shares.

Rakesh Jhunjhunwala  says that you must not get carried away by the positives of the share. Don’t get carried away by your own logic. What are the risk factors? What are the drawbacks? You must consciously ask yourself this question says Rakesh Jhunjhunwala.

If you have the CONVICTION that you are right about the share, only then go ahead and buy it.

Rakesh Jhunjhunwala says that if you bought a share that turns out to be a dud, accept that reality and do not compound the mistake by hanging on to the dud.

SAFETY OF CAPITAL & ABSOLUTE RETURNS

Rakesh Jhunjhunwala‘s next mantra also follows in logical progression to his other mantras. Take care of your capital! Don’t risk it foolishly! If you have no capital left, where is the question of returns and where is the question of compounding asks Rakesh Jhunjhunwala!

Rakesh Jhunjhunwala‘s tips on HOW TO CHOOSE AN INVESTMENT

Okay, now we come to the most important segment – How to choose an investment?

Rakesh Jhunjhunwala is a genius because it is only a genius who is able to present a successful investment strategy in an easy-to-understand format and most willing to share the formula with his less-fortunate brethren!

Rakesh Jhunjhunwala is like Warren Buffet and Benjamin Graham in emphasizing that we are not buying just a little thing that bounces about 2% every day on the stock market – but we are buying a part of a real business. He urges us to think like an owner of a business would. If you were really buying a business, what is the extent of research you would have done and care taken. Rakesh Jhunjhunwala‘s tips on what we should look for whilst buying a share is a clear indicator that he wants us to think that we are buying a part of a business.

Rakesh Jhunjhunwala says that we must look for the following in any business we are looking to own.

(i) Attractive, addressable external opportunity;

(ii) Sustainable competitive advantage – the "moat" that Warren Buffet always refers to as his investment technique;

(iii) Scalability + operating leverage. How far can the business go – in volume terms and in geographical terms;

(iv) Management quality + integrity. You don’t want to be partners with unscrupulous fellows, do you;

(v) EVA positive over investment horizon. Yes, a short-term aberration in the profitability is acceptable but the idea must turn positive over your investment horizon;

(vi) Valuation: Price –Value divergence. Ultimately, everything boils down to this. What is the value of the Company? And what are you paying for it? Obviously, the more the value and the less the price is the best case scenario.

Rakesh Jhunjhunwala‘s 10 commandments for investors (tips on how YOU can be a great investor):

Rakesh Jhunjhunwala is not a legend for nothing. Not content with telling us what techniques we should adopt whilst picking our portfolio, he also tells us what mental attitude we should cultivate to be a successful investor.

(i) Be an optimist! The necessary quality for investing success;

(ii) Expect a realistic return. Balance fear and greed.

(iii) Invest on broad parameters and the larger picture. Make it an act of wisdom, not intelligence.

(iv) Caveat emptor. Never forget this four-letter word -R-I-S-K.

(v) Be disciplined. Have a game plan.

(vi) Be flexible. For Investing is always in the realms of possibilities.

(vii) Contrarian investing. Not a rule, not ruled out.

(viii) Its important what you buy. It’s more important at what price you buy.

(ix) Have conviction. Be patient. Your patience may be tested, but your conviction will be rewarded.

(x) Make exit an independent decision, not driven by profit or loss.

Each of the said 10 commandments deserves to be etched in stone and read and re-read everyday by anyone who aspires to reach the heights of Rakesh Jhunjhunwala!!

Rakesh Jhunjhunwala‘s tip on when to sell and AN INVESTMENT

Rakesh Jhunjhunwala enhasizes that not only should you know when to buy but you should also know when to sell. As Rakesh Jhunjhunwala says in one of his commandment, learn to balance greed with fear and have reasonable expectations.

(i) Asset Allocation: It is interesting that Rakesh Jhunjhunwala never tires of emphasizing the need for proper asset allocation. If your asset allocation has gone haywire, don’t hesitate to sell to bring it back on track;

(ii) Review of Critical Factors: when you make an investment, you have hopefully paid attenbtion to the factors that Rakesh Jhunjhunwala emphasized that you should bear in mind. Keep reviewing these factors, emphasizes Rakesh Jhunjhunwala. If any of them changes adversely, sell;

(iii) Relative Opportunity: Again, trust Rakesh Jhunjhunwala to state the obvious but which all of us overlook. Keep your eyes peeled for better investment opportunities cautions Rakesh Jhunjhunwala. Is Gold a better investment opportunity? If you have that conviction, re-balance your asset allocations;

(iv) EPS or EPS Expectation Peaks: If the EPS has reached levels that can’t be matched in the near future, that’s a sign that you should exit says Rakesh Jhunjhunwala;

(v) PE Absurdity: Keep an eye on irrational behavior from other market participants. If you see a bubble building, get out before it bursts says Rakesh Jhunjhunwala;

(vi) Not Driven by Profit/Loss -Independent. This is a profound statement by Rakesh Jhunjhunwala. Don’t behave like an emotional creature and be averse to loss or get excited by profits. Keep a cool head and evaluate all decisons on an independent platform, cautions Rakesh Jhunjhunwala. Don’t refuse to sell because you don’t want to book losses and don’t rush to sell only because you have made profits. Decide independently, on the merits of the investment and whether it has any more steam left or not.