Experts view and mistakes

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MP Guru
Ten veterans of the Indian Stock markets talk about their worst blunders, and the lessons they learned the hard way.

(1) CLIFFORD ALVARES, GULSHAN TANEJA,
VATSALA KAMAT
I BOUGHT ACC at Rs 10,000 per share at the height of the Harshad Mehta-led bull run in April 1992. I invested heavily in companies from ‘sunrise’ industries such as finance, aquaculture, textiles and steel in 1994. I stacked my portfolio with PSU stocks in the mid-nineties in anticipation of disinvestment. I entered Wipro when it hit five-figures as my broker told me it would double in six months...
Let’s face it: we have all made bad investment choices at some point or the other. Learning from your mistakes is great, but it’s even better to learn from others’. For one, it’s easier on your bank balance and the nightly eight hours of peaceful sleep. And who better to take a cue from than the market experts themselves.
It’s not as if they were born with their stock-picking skills. They learned–and are still learning–the hard way. Says BSE (Bombay Stock Exchange) broker Rakesh Jhunjhunwala: "You learn the stock market by trial and error. Without making mistakes in the market, you will never be able to progress in it." What’s important is to spot the mistakes, learn from them, and move on.
Ten market experts share with us some of those threshold moments–the mistakes they made–on their learning curve. There are great lessons and many little nuggets of investment wisdom–on market behaviour, valuation methods, portfolio management, investor mindsets–in their stories. Over to the gurus in their own words.

(2) MOTILAL OSWAL
CHAIRMAN AND MANAGING DIRECTOR, MOTILAL OSWAL SECURITIES
In 1992-93, I bought shares of a glass company at Rs 1,600. The price crashed, and I exited when it was Rs 60. Why did I buy the stock? The outcry system was in vogue, and everyone on the floor used to share information, which was our idea of research. If I liked an idea, I just bought the scrip.
We never invested with a time horizon. If the share price went up, we booked profits. We followed no investment strategy and did not bother with research. At one point, I had 125 scrips in my portfolio. Eventually, at the end of the year, I sold those that made a profit and held on to those that showed a loss. Obviously, the total return on my portfolio was not worth the effort put in.
After that, I decided to prune my portfolio to 30 stocks–and booked more losses in the process. I decided to invest the money left with me wisely, balancing my portfolio with a long-term outlook. Now, I hold every stock for at least one year, and then, depending on the market situation, decide what to do with each.
LESSONS
DO YOUR HOMEWORK WELL. While choosing a stock, you could use either the top-down approach or the bottom-up approach. In the former, you look for a good company in an industry that is doing well, say, IT. In the latter, you scout for a company with good fundamentals, irrespective of the performance of the industry or the economy as a whole. For instance, though the steel industry is doing badly, you may decide to invest in Tisco because of its strong fundamentals.
DON’T FOLLOW THE HERD. Don’t buy (or sell) just because everybody and his dog is buying (or selling). Research the com-pany as thoroughly as possible before deciding to buy or sell. Don’t buy in an overheated market and don’t sell when there is panic.

(3) SHREEKANT PANDEY
DIRECTOR, SUNDARAM NEWTON AMC
In the late-seventies, during the global oil crisis, I invested in an oil company called Halliburton. My investment soon doubled. I bought into two more companies in the same sector; again, I nearly doubled my investment. Then, blindly, I bought some more oil stocks, only to see my investment go bust! The same pattern of returns followed when I invested in the retailing service sector, billed as a growing sector at the time.
Another mistake I made was in a stock called Hindustan Power Plus, three years ago. With an MNC parent, good demand for its product and earnings growth, I thought the stock was going cheap at around Rs 30. The stock never appreciated, and a year later, I booked a loss. A classic case of a stock where the earnings growth is good, but the management is indifferent to minority shareholders.
LESSONS
SECTORS AND STOCKS HAVE CYCLES. Every sector–and stock–goes through peaks and troughs. Hype over a sector mostly sets in around the time it is beginning to peak. So, beware of entering at the fag end of the cycle. The top companies in the sector are the first to rise. These are followed by second-rung companies, and then junk stocks. Once the hype is over, only the top companies survive; the rest fall by the wayside.
ASSESS THE MANAGEMENT. Assessing the quality of management includes studying its performance and concern for shareholders. Look for the four Cs: concern for shareholders, corporate governance, credibility and competence.
PAY ATTENTION TO WEIGHTAGES IN YOUR PORTFOLIO. Say, you have X exposure to equity in your portfolio. If this X appreciates to 2X, trim it back to X unless you have sound reasons to believe otherwise. Also, when a stock moves 10-15 per cent away from the mean set by you, cut your exposure in that share immediately.

(4) RAVI MEHROTRA
SENIOR VICE-PRESIDENT AND CHIEF INVESTMENT OFFICER, KOTHARI PIONEER AMC
A few years ago, I used to value each company by breaking it down into its various businesses and subsidiaries. I would look at each one independently, and then conclude its impact on the share price.
I once invested in an auto-ancillary company at an average price of Rs 250. The company was doing well, but I was more interested in its 40 per cent holding in an auto company, which was showing attractive growth. In fact, the value of its investment in the subsidiary was more than its own market capitalisation, which indicated good appreciation potential.
But, the appreciation never materialised–the share price of the auto-ancillary company didn’t adjust upwards to reflect its holding in its subsidiary. Eventually, I booked losses at Rs 100.
Another time, I bought into an entertainment company after a reputed multinational acquired a strategic 2 per cent stake in it. My rationale: the MNC would inculcate professionalism and bring about an improvement in the entertainment company’s performance. I was wrong. The multinational was not interested in managing the entertainment company’s business. It just wanted to sell its equipment to the entertainment company–and the purchase of the stake was an entry price.
LESSONS
DON’T REACT TO NEWS IN HASTE. Every news bite emanating from companies is fodder for market players to influence share valuations. Hence, it becomes important to differentiate between material news and information of a cosmetic nature. While basing an investment decision on a piece of news, make sure that what you see is what you get.
LOOK AT THE MAIN BUSINESS, NOT SUBSIDIARIES. Theoretically, a company’s intrinsic worth should equal the sum of its parts, namely businesses, subsidiaries, financial assets and so on. Such a valuation methodology might pay off in developed markets, but in an imperfect one like ours, it might be asking too much. So, peg your investment decision to a company’s primary business, not secondary avenues that might or might not materialise.

(5) GUL TEKCHANDANI
CHIEF INVESTMENT OFFICER, SUN F&C ASSET MANAGEMENT
Every time I blunder in the market, it’s because of excessive greed. When share prices move up and I hear favourable stories, I don’t think of selling and always hope to make more. I remember buying shares of a plastic furniture company at Rs 30. I had analysed the company and predicted the stock would go up to Rs 90. I was right: the price touched Rs 110. That’s when I started hearing stories of the company doing so well that the price would touch Rs 200. So I decided to hang on, in spite of knowing better. Today, the stock trades at Rs 6.
LESSONS
DISCIPLINE IS THE KEY. The market has a mind of its own, one which is quite likely to confuse investors. You cannot make money in the market by acting on market rumours. Listen to the stories, but do your own research–and do it thoroughly. Make your buy or sell decision based on your analysis of the company, not on what others have told you.
So, if you have invested in a company for the long term, and the price falls in around three months, don’t change your strategy. The company’s fundamentals have not changed–it’s the market that’s volatile. In the long term, the fundamentals will reward you.
KEEP TRACK OF YOUR INVESTMENTS. However, investing for the long term does not mean you forget about your holding. Stay alert, and monitor your stocks with a view to improving your returns. Keep an eye on the changing economy, because the fundamentals of a company are dynamic and change with the overall economy.

(6) DIVYA KRISHNAN
CHIEF INVESTMENT OFFICER, SBI MUTUAL FUND
We were caught on the wrong foot in software, as we were late to recognise the fact that valuations in the sector had become overstretched. We made the right calls on growth rates, but were relatively late to book profits. This was partly due to the inherently competitive nature of the mutual fund industry: since we are assessed on a quarterly basis against our peers, it’s not possible to consistently follow a conservative approach.
LESSONS
PRICE IS IMPORTANT. Zeroing in on a great company is one half of the investment puzzle. You also have to see whether the company is worth investing in at its current price, for that will ultimately determine your returns. Buy the right company only at the right price. Likewise, sell it when its valuations appear overstretched.
Review and decide. Hope is an easy crutch to lean on. Pressure or no pressure, there’s always a tendency to stay invested when the going is good in the hope of making a little more money. Similarly, if an investment is showing a loss, people refrain from selling thinking the stock is bound to rebound. The bottom line: base your investment decision solely on fundamentals.

(7) KISAN R. CHOKSEY
CHAIRMAN, KISAN RATILAL CHOKSEY SHARES AND SECURITIES
Five years ago, I invested in Shrishti Video Corp, a media company that developed content for television channels. I identified the company at an early stage, when the price was Rs 18-20. The stock went up to Rs 200, but I did not sell in the expectation that it would rise further. Soon after, the company changed its focus from the content business to the channel business, something that was beyond the management’s capacity. At that point, I did not understand that the changed focus would ruin the company. Today, the company is delisted.
LESSONS
ANALYSE THE BUSINESS. Study the industry and the company thoroughly, and analyse its strengths and weaknesses. Also look at the quality of management–an over-ambitious management could consider expanding operations beyond the company’s capacity.
DON’T SHY AWAY FROM BOOKING PROFITS. It’s important to be willing to give up on the upside to protect your downside. Work out your risk-reward profile, and set a target price for each stock. Book profits as the share appreciates, even if it is in phases. For, when a stock plummets from its peak, you may be caught unawares.

(8) DARSHAN MEHTA
CHIEF EXECUTIVE OFFICER, ANAGRAM STOCKBROKING
In the early nineties, the primary market was extremely active, and, like many retail investors, new issues made up a good chunk of my portfolio. Back then, pricing of public issues was regulated–and, invariably, conservative.
So, even if you held on to allotted shares for no reason other than inertia, you made a notional profit. I was allotted 2,000 shares of Essar Shipping, which I held on to because their cost was significantly lower than the prevailing market price. My portfolio of 85-90 scrips was filled with the likes of Essar Shipping–neither led by a quality management nor the flavour of the season. I slept on them, and lost out–my portfolio depleted in value substantially.
On top of that, the sheer size of my portfolio made it impossible for me to track even those companies in which I was invested. One fine day, I gave the list of my holdings–a whole lot of them worthless–to my broker, and asked him to sell it at whatever price he got. But the damage had been done.
LESSONS
MAINTAIN A LEAN PORTFOLIO. Don’t grow too big for your boots. There’s no point in having a portfolio of 90 stocks if you cannot track them. If diversification is what you seek, you can achieve the objective with just 10 stocks. What matters is not how many stocks you have in your portfolio, but what kind of stocks these are. Moreover, the fewer stocks in your portfolio, the easier it is to track them.
DON’T LOSE SIGHT OF YOUR INITIAL OBJECTIVE. Invest with an objective in mind. Once that objective is met, look to exit unless there are very good reasons to stay invested. In rising markets, new issues ride on the coattails of the bullishness, and list at hefty premiums to their issue prices. But once the euphoria subsides, so does the share price. So, keep your options open.

(9) PARAG PARIKH
CHAIRMAN, PARAG PARIKH FINANCIAL
ADVISORY SERVICES
I believe the key to any good investment is discipline and the ability to control your emotions. Easier said than done. There have been times when I have given in to my emotions–and paid the price.
We do portfolio management for clients. Once, we took money from investors when the market was bullish. Obviously, since the market was on a roll, the risk was higher–and so were the chances of going wrong. A disciplined approach warrants that I take money from clients when there are ample investment opportunities in the market, not when people are willing to give me money. I should have had the guts to tell them, "no, don’t give me your money now, I’ll tell you when to give it". But my emotions took over, and I didn’t.
LESSONS
DON’T GET IN AT PEAKS. Stock markets are not always the barometer of the economy, or even of a company. With globalisation and hot fund flows, they have become glorified casinos and don’t always reflect the true worth of its constituents. Hence, always invest for the long term and avoid short-term momentum plays. Bear in mind that momentum works both ways: you could crash as easily as you soar.
DON’T SPECULATE. If you buy today and sell tomorrow, you’re not investing–you’re trading. And that is one dangerous proposition. If you don’t understand technicals or are not clued in to the market grapevine, the odds are stacked against you.
BE FLEXIBLE WITH YOUR INVESTMENT MIX. Don’t hold stocks for the sake of holding equities. Sometimes, it’s better to hold cash or debt to maximise returns. Your investment mix should reflect your perception of the market. If you feel valuations are high and a downturn is looming, lighten up on equity and shift to debt. And get back in when you are comfortable with valuations.

(9) RAKESH JHUNJHUNWALA
BROKER, BOMBAY STOCK EXCHANGE
When I am convinced about a story, I tend to go overboard–and over-invest. At times, I have ended up investing a lot of money in illiquid stocks, which is obviously difficult to manage. It’s like putting all your eggs in one basket.
In the stock markets, both in India and elsewhere, people tend to invest only when there is a wave of euphoria sweeping the markets. It’s a general tendency to act on the belief that one should not be left behind in a booming market, which is a flawed argument.
LESSONS
DON’T BE OVERSTRETCHED IN A STOCK. Even if you have hit on a great idea, review your allocations in a particular stock periodically. Ideally, you should not invest more than 15 per cent of your portfolio in one stock. Overexposure can be counter-productive, more so if a stock is illiquid.

(10) DILEEP MADGAVKAR
CHIEF INVESTMENT OFFICER, PRUDENTIAL ICICI MUTUAL FUND
In 1992, I invested in a few commodity stocks. I thought the companies I was investing in, specifically Hindalco and Nalco, were globally competitive. Unfortunately, that was when industrial growth was slackening and commodities were at the bottom of the pile. Studies of cash flows did not translate into profits.
I analysed these stocks using technical research and models, and most of the results were pretty much in line with what I predicted. It was the discounting (PE ratio) that threw all my calculations out of gear, and I made losses.
LESSONS
COMMODITIES GET LOWER DISCOUNTING. In commodities businesses, value-addition is limited to the usage of the product. When a plant reaches its maximum capacity, the company has to invest more to set up new units to increase business. But a degree of circumspection is called for during capacity expansion because commodities are cyclical businesses.
On the other hand, a non-commodity business like software can flourish because scalability is far easier to achieve–which is partly why the market gives them a higher discounting than commodity stocks.
CASH IS KING. Cash flows say a lot more about a company than the profit and loss numbers. You cannot fudge cash flows: a cash outflow is an outflow. The share price of a company is today determined by its ability to generate future cash. What you have to look for is how much cash a company can yield vis-a-vis the amount you put in.
LOOK AHEAD. Very often, it is possible to make accurate cash flow predictions based on the EPS (earnings per share) of a company. But it’s almost impossible to predict the PE ratio of a company. What you can do is to check if the PE ratio is linear or non-linear in its ability to scale up.
Here’s a checklist of what to look for before investing in a company:
1.Fundamentals of the company
2.Management
3.Industry prospects
4.Total cost, vision and accounting policies
5.Return on net worth over the past few years
6.Return on capital employed
7.Earnings per share
ONE FINAL PIECE OF ADVICE: IF YOU HAVE MADE A MISTAKE, ADMIT IT, AND REVERSE THE DECISION SWIFTLY.
 
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