Most market gurus in India like to preach the virtues of patience and caution and urge investors to be happy with a 15 per cent return from equities. But not this charismatic Kolkata-based investor who has made a living out of stock market investing and has a large fan following - Basant Maheshwari.
Finding multi-baggers in the stock market is his passion and he makes no bones about it.
"Paisa jaldi banana hai ki zyaada?" Basant asked a packed audience of 300-350 investors at a seminar conducted by the Tamilnadu Investors Association at Chennai.
His advice to investors who want to make a debut in the stock market is to focus on zyaada, because only that can lead to wealth creation.
"Most people start buying shares thinking they will make ₹2,000 or ₹5,000 a day. But that cannot change your life. What can change your life is making ₹2 crore or ₹5 crore over many years," he says.
Creating that kind of wealth, he qualifies, will take a lot of time and dedication. First, you cannot consider stock market investing to be a hobby. It is a full-time activity. "Hobbies always cost you money," he quips.
Fascinated with markets since his college days, Basant worked for six years at his family firm before becoming a full-time investor.
His second bit of advice is to invest enough money in equities to make a difference to your wealth. "You are not poorer by 10 or 15 per cent in life. You are poorer by 10 times. So, you cannot create wealth by investing ₹50,000," he says.
But he advises starting small because to really understand equity investing, you first have to lose money. He did not make money in the market for the first ten years. "I used to buy low P/E stocks at their 52-week lows. If the price of the stock was in single digits, even better," he laughs.
He asks investors not to look to the stock markets for regular income. "Stocks cannot help you pay your tuition fees or electricity bills. For five years, a stock may do nothing. Then it may suddenly go up fivefold. Plus, a bank FD never falls 80 per cent in a bear market. But a stock has all the right to do so," he says, irrespective of whether a stock is a blue chip or a tiny cap.
Basant's most successful stock picks were Pantaloon Retail, which he bought because he thought it could be India's Wal-Mart, TV18, Page Industries, Repco Home and Gruh Finance. He bought Pantaloon at ₹7 and the stock went up to ₹875, but he sold it around ₹280.
So what are his secrets to finding such multi-baggers? He outlines three clear strategies.
One, look for companies with good cash flows and secular earnings growth. Avoid cyclicals. "What are the stocks that have made the most money in 20 years? Asian Paints, Nestle, Infosys, Marico, Dabur, Eicher Motors, Bajaj Auto," he reels off. He points out that you will never find a Sterlite, Tata Steel or Coal India in that list. Making money from cyclical stocks needs two good decisions: an entry decision and an exit decision.
He also asks investors to avoid regulated sectors or those with government intervention. "Take HPCL. We've kept hearing the deregulation story, but it has not made money in ten years."
"When we invest in markets, we suddenly become patriots. We say India needs coal, so let's invest in Coal India. Or we have load-shedding in our city, so let's buy power stocks. That's the government's job, not yours," he points out.
Highly regulated businesses don't create wealth because the government has a welfare motive. He cites the example of Coal India, which sells coal at a huge discount to global prices.
Two, really good stocks don't come cheap. Companies growing revenues and profits at an above-average rate always trade at a high P/E, at a premium to the market. He points out that L&T was never cheap. Nor was Page Industries, one of his multi-baggers. When Basant bought it during March 2009 lows, many blue chips were trading at 5-6 times earnings, but Page Industries was at a P/E of 16. He still went ahead and bought it. He feels that in sectors or businesses with strong brands and high entry barriers, high P/Es can be sustained.
As most of the money in markets is made by identifying secular trends, he also likes to bet on stocks at their 52 week highs! "When a new trend is unfolding, stocks belonging to the sector regularly make new highs. So anything that is at a 52 week high attracts my attention," he says.
Once you identify a trend (like software in 1994), it is best to go for the sector leaders, companies with strong cash flows and high return on equity, he recommends. "Don't buy the poorer cousins in a sector. If you bought Infosys in the nineties you are wealthy. But if you bought Silverline or DSQ Software, you lost everything."
His logic is that companies that generate strong cash flows can pay out higher dividends. So even if the business is dull for a while, investors receive dividends. "Dividends are life jackets to stocks. Dividends are tax-free and they keep growing," so they establish a floor to the stock price.
When to sell
His final piece of advice is not be in a hurry to 'book profits' as this is how people lose out on the biggest wealth creation opportunities of their lives.
He advises holding onto stocks for years as long as the company's profits are growing. It doesn't matter if it remains at a high P/E.
"If a stock you bought for ₹100 goes to ₹150, you rush to sell it. If it goes to ₹60, you hold on and wait for it to come back to ₹100. That's how you lose money. If you buy property and its value goes up, you don't sell the kitchen and say the bedroom is now free! Why are we so insecure about making money in stocks?" he jokes.
He explains that many people who have become rich through equity investing bought 15-20 stocks many years ago and just didn't sell them. Of the 15, 12 "would have become junk." But 3 stocks would have turned out multi-baggers!
The problem with frequently 'booking profits' is that you have to keep finding new ideas to invest in. "If you get one idea every month, there's something wrong with your strategy. Good ideas come to you occasionally, once in six months or a year."
He rounds off his session by saying that stock market investing, unlike investing in gold or bank deposits needs knowledge. "If you don't have a good idea about investing, just go to a mutual fund. It won't pay off like individual stocks but it will still work out better than bank deposits. Just consider the opportunity cost. Good funds have managed 22-25 per cent, which is still better than 8 per cent."