'One will always commit mistakes in the market'

In the first part of the story, we got to know about the investment journey of Raamdeo Agrawal. Let us now continue further.

Who are your role models in the world of investing? What do you like about them?
I learnt about the power of compounding from late Shri Chandrakantji Sampat. Though I knew the concept of compounding, I didn't know about the connection between that and the stock market. This is the only maths which connects. People write 'CAGR' but they are not aware of it and how it works. Something doubles in five years if it compounds by 15 per cent per annum. At 25 per cent, it doubles in three years. In 10 years, it would be 10 times at the rate of 25 per cent per annum. In 20 years, it would be 100 times. In 30 years, it would be 1,000 times. People don't know this fact, though this is simple maths. I learnt this from Chandrakantji in 1991. So, it was a big breakthrough for me.

From Buffett, I learnt not to focus on the EPS but on ROE; to focus on quality franchises. Businesses are of two types: good and bad. Managements are two types: good and bad. So, you will have to sort out these two first because compounding doesn't happen in all the businesses. In fact, there are more failures than successes. So, the real logic is to figure out where money is going to compound - a good business run by a good management. People worry about valuations but before that, one must assess the business and the management. The market is very smart in valuing. A company doesn't get a P/E of five and another gets a P/E of 100 in the same field.

Year after year, Buffett has been talking about everything very openly in his annual letters and then discourses and interviews. He has been very patient in explaining concepts to people. The most important is his 2007 letter where he talks about the difference between a great business, a good business and a gruesome business. Most entrepreneurs worldwide don't know the difference between a good business and a bad business. No matter how competent you are, if you do bad, fundamentally handicapped business, nothing can help. One can figure out the business by doing some research but you get to know about the management only by meeting with it. The biggest thing is whether the management has the competence, passion and integrity - above all, integrity. You often find people who are competent and have passion but they lack integrity.

I learnt 80-90 per cent from Buffett. Other personalities who I have learnt include Philip Fisher (from his book 'Common Stocks and Uncommon Profits'). From him, I also learnt about how to go about asking questions, how to look at growth companies and things like that. Then we have Michael Mauboussin's 'Expectations Investing'. He is a pretty good writer on a lot of upcoming subjects, such as network business. Then, of course, Benjamin Graham, if you read the classic 'The Intelligent Investor'. I learnt the concept of margin of safety from him. When I read about Buffett, I thought that since Benjamin Graham is his guru, I need not read him as Buffett would have taken care of his teachings. But after eight years, I realised that I am buying only quality stocks at any price. That was a wrong thing. Then I read Benjamin Graham and that brought the concept of margin of safety. So, you gradually keep learning one thing at a time. Mind learns slowly; in one day, it cannot learn everything.

All this has to be learnt gradually. Every year, in every wealth-creation study, there is at least one learning. In 25 years, if we got 25 lessons, that in itself is a big thing.

What's your investment framework? How has it developed over the years?
Until 1994, I was directionless and used to buy stocks which looked cheap. As a CA, I was able to read the balance sheet and understand profitability ratios, growth ratios and valuations. At that time, markets were also cheap as there was no competition and no one was reading financial statements, so it was easy for us to make money. Post 1994, we started looking at high quality businesses and growth companies at reasonable prices. In 2013, I wrote one wealth-creation study where we said our formula is QGLP: quality, growth, longevity and a reasonable price. That became our framework of picking and appraising a stock. I can say that it is a very comprehensive formula even today. It helps us process any company on the basis of four to five questions regarding the quality of business, management, growth, future prospects and what should be the typical value of the stock.

Warren Buffett has taught the difference between price and value of a stock, but everybody knows the price but no one knows the value. People equate price and value to be the same. However, price is what you pay and value is what you get. So, these are the few things which we kept on learning continuously and they have helped us to remain cautious and avoid a lot of mistakes. One will always commit mistakes in the market and no one can go without that, but it is about how few mistakes you do. Even in the index, not all 50 companies go up at the same time, but the few which do take care of all the losses and help the index deliver good returns.

What's your recipe for dealing with the impact of blackswan events, like COVID, on the markets? How do you keep yourself focused amid the incessant market noise?
Now we have seen quite a few of them. That's why you should never be leveraged in the stock market. Personally, I have seen four instances where the markets have fallen 50-70 per cent. So, whenever I see any valuation, I always consider it half. And from any level, for instance, if valuations have halved, I still consider them to be half of that. I know that these are all temporary and that in six to eight months' time, the market comes back. This is because the central bank and the government would reflate the economy to bring it back from the collapse. In my experience, your portfolio comes back to previous levels in less than a year. You need not fear such drawdowns as these are part of the market. I know that my current portfolio would rise further and will come down to lower levels. I am waiting for that kind of loss. You have to be mentally ready that in the stock market you can sustain 20-30 per cent loss.

There are two types of losses. One is permanent loss and the second is quotational loss. This is also a concept I got from Warren Buffett. Quotational loss is when the market loses, say, 10 per cent today. However, tomorrow it could be up, say, 5 per cent. So, neither move reflects what is right. But if in a year's time, the portfolio is up 15 per cent, then that is the real thing.

This interview was conducted in January 2022

Other parts of the interview:

'The best time to buy is when you have the money'

'Conviction on your own investment philosophy is the key'