According to the late Rakesh Jhujhunwala, the biggest red flag in a business is that the promoter doesn’t want to authorize.
In a 2013 lecture to students at FLAME University, India’s Big Bull said investors should look closely at corporate sponsors and management. “If the promoter signs anything, with his ego getting in the way (that should set off alarm bells),” he said.
Then, expanding on the importance of having the right leaders, he said, “You have to check if management is a wealth creator or a profit maker, the difference is very, very important. .”
According to him, the quality of management is one of seven factors – the rest are addressable opportunities, competitiveness, scalability, operating leverage, quality of management and valuation – that an investor should take into account.
Jhunjhunwala, who passed away in August 2022 from cardiac arrest, had several rules of investing and they relied heavily on qualitative aspects of a business. “You need to look at the factors that drive earnings and valuations, rather than earnings and valuations themselves,” he said. “See what drives returns, rather than trying to predict returns,” he explains, adding that qualitative analysis is much more important than quantitative analysis.
Some of the quantitative metrics to check, he said, include dividend payout, rate of return (RoI + RoE), cash flow (OCF + FCF), which he considers key to identifying a business. accumulation.
Another of his investing fundamentals is looking at the big picture. “Make it (investment) a wise act, not a smart one,” he explains. Jhunjhunwala recounted one incident to build on another lesson he needed to impart about investing. It was from one day he was at Geoffrey’s bar, where people asked him for stock market advice. Often he dismisses such requests, wanting to relax with a glass of wine. But once, he tipped a stock that was trading at Rs 70, when the person asked how far she was going. Jhunjhunwala said it can go up to Rs 150 after three or four years and the person is not impressed. “I told him, this is the address of the Racecourse Road,” replied Jhunjhunwala.
As for students, he added: “If I make 18% in my wallet, I think I’m king. If I make 25%, I think I’m the emperor… expect real return (from investment), balance between greed and fear.
Investors need to be both disciplined and flexible, he said. For the first, there is a game plan. Second, remember that “investment is always possible”. Jhunjhunwala warned against going against its interests. But at the same time, he asked them not to completely rule out opposing opinions. As he said, be flexible.
Finally, he emphasized that they must have faith and patience. “Your patience may be tested, but your faith will be rewarded,” he said.
