Equity still best vehicle for returns: Rakesh Jhunjhunwala
The world of investing is full of paradoxes. It is very dynamic and continuously changing, but the basics of investing do not change. The prerequisites of successful investing have not changed since time immemorial. Successful investing is about attitudes, more than anything else. It is an outlook, and a discipline. The world of investing relates to two crucial decisions - the asset allocation decision and the specific asset decision.
Asset allocation decision:
Time, rate of return and risk are the three dimensions of investing. All three dimensions are inter-linked and act upon each other. The asset allocation decision must be driven by your financial goals, and by your risk appetite. The three dimensions are an outcome of your asset allocation decision. This decision contributes the most to the long-term performance of your investments. With my conviction in the long-term growth story of India, I am fully invested in Indian equities. You must reach your own conclusions, but I am unable to perceive any other asset class in India that can give comparable post-tax returns in the near future. Specific asset decision: Longevity, growth and quality of growth are the key parameters that determine the success of any investment. Hence, one must look for the reasons of longevity, growth and quality of growth.
To my mind, they are:
- External opportunity
- Sustainable competitive ability
- Scalability and operating leverage
- Management quality and capital efficiency
- Price and value divergence
All the first four factors are on one side, and the price-value divergence is on the other side. It is important what we buy; it is more important at what price we buy. In this context, I have invested across many sectors. I have placed greater emphasis on superior business models rather than sectors for my investing decisions. I have found that the entrepreneur makes an invaluable difference to my investment returns.
Recognising the passion and the skills of the entrepreneur and then believing in the vision and the beliefs of the entrepreneur, and above all validating the risks that may or may not be perceived by the entrepreneur; are the key success factors for being able to tap the entrepreneurial energy for your investments. Rather than attempting to project quantum of profits precisely, it is of a greater consequence to understand the broad drivers of profit and growth.
I recognise that I invest in the realms of possibilities and probabilities. I also recognise that I invest with limited understanding and many uncertainties. The probability of loss and the extent of loss are parameters that impact my risk. I focus on reducing both the probability of loss (by my understanding and involvement), and the extent of loss (by my entry pricing that gives me margin of safety). The potential of gain and the extent of gain are determined by the quantum of change, and the duration of change that takes place. I can only attempt to interpret the direction, and consciously do not attempt to interpret the quantum. My long-term timeframe for investing has been a significant contributor to my investment success.
Investment ideas:
My faith in the confluence of the capital expenditure and consumption cycle in India lead me to believe that there are opportunities in domestic consumption and construction and engineering sectors. I also see opportunities in Indian skill-sets and competencies. I see many drivers for Indian equities, including earnings momentum, re-rating potential and lack of investment alternatives for India’s growing savings, larger aspirations and rising risk-appetite. The secular and structural drivers, including demographics, productivity and enterprise, are empowering the structural and secular bull market in India.
Investment exit: Price = EPS (earnings per share) x P/E ratio.
While everyone knows this simple formula, very few understand the potent effect of getting both earnings expansion and P/E re-rating on their investment returns. I believe that the earnings momentum of India Inc will sustain and the equity participation by Indian and foreign investors is still at a fairly nascent stage. In this context, equity valuations are still far away from their peak valuations. I would consider exit only when I believe that earnings/expectations of earnings have peaked, or when the price-earnings multiple are unsustainable. But that time is still very distant in the Indian context.
Conclusion:
As articulated above, Indian equities can still provide fertile returns for investors for many years to come. Though that may not be true for all times, as equities may reach ridiculous levels at some time, we are very far from that stage as of now. While other asset classes like real estate may also give interesting returns, I am convinced that equities are still the best and the most appropriate asset class at the present juncture. I firmly believe that superior investment returns are a function of wisdom and patience, rather than intellect and expectations of quick and high returns. This attitudinal difference is the key differentiator that marks successful investing.
Source: DNA Money
