The 1980s: Period of three extraordinary investors
Moneycontrol | November 20, 2015
Ramesh Damani in his series Wizards of Dalal Street caught up with Durgesh Shah, member, governing body of Flame University and Vinod Sethi, former president of Morgan Stanley
Ramesh Damani in his series Wizards of Dalal Street caught up with Durgesh Shah, member, governing body of Flame University and Vinod Sethi, former president of Morgan Stanley.
The trio chat about the 1980s - which Damani dubs as an extraordinary period.
Below is the verbatim transcript of Durgesh Shah and Vinod Sethi’s interview with Ramesh Damani on CNBC-TV18.
Q: Back in the 1980s - 35 years back the BSE Sensex was 100 and great bull market ensued over the next 35 years, index is closer to 30000 now but he foundation of that bull market was laid by an unlikely character, the father of the bull market the law of consequences was who?
Shah: You have to go back to 1975 - the Emergency. It almost killed the stock market. You had a situation where very few stocks were traded. The youngsters at the exchange would go for movies, this is what I was told, I was not there but. I was told that they would go for movies during the market hours because there was nothing that was traded, there were dividend freezes and all kind of things. So, coming out of that you had the Janta government and George Fernandes wanted to Indianise in some form or shape the foreign companies. So, he gave them an option you either sell part of your shares to the Indian investors or you go back to your country, leave India. Few companies like CocaCola, IBM decided to go back, however many of them like Colgate and Lever and Nestle decided to dilute.
There was an authority called the controller of capital issues who decided on what would be the price of dilution. Those were amazingly cheap valuations. So, that actually triggered a big boom into the Indian markets. All the employees of these companies realised that what they were getting was very attractive. Indians never understood dividend payouts till they saw these companies payout crazily.
I remember Colgate would give a bonus issue whenever the book value touched 28 because again there was a restriction at which you could capitalise the reserves so that you can then increase the dividend. So, it was an unbelievable situation.
Q: 1989 no Indian was coming to the market. You were an Indian in New York and you were bullish on India?
Sethi: Yes. We thought that India was at the cusp of a sociological change. Among many things we truly believe that capitalism has sort of won the cold war with the Berlin Wall coming down. It was like one line summary in the sense that capitalism had won the cold war if you will. That at the end of the day was our belief that things were ridiculously cheap, what Durgesh said was absolutely true. I think in India you were also getting multi-nationals very cheap on the markets. So, there were some absolute benchmarks too. However at the heart of it we felt that India was in the midst of a change.
Q: Again around the 1989 period India actually had to sell its gold and mortgage its gold to get foreign exchange reserves. The height of a crisis, was that the buying opportunity?
Sethi: Yes. In fact if you look at history all crisis have been buying opportunities in India. You look at tragic times like Rajiv Gandhi's assassination and so on and so forth, the crisis have been turning points in India.
Q: In the 80s a lot of other things happened, we had the first bull market, we had a telecom boom, we had Rajiv Gandhi speak on the need of transforming India into the digital age. Did you catch any of those themes as you were a student of those years?
Shah: We did catch those themes but I wouldn’t say that it was top down approach. We were able to identify Vindhya Telelinks and Finolex Cables those companies who benefited out of those cable companies which actually was for the telecom sector at that time. So, we did make money out of those. I remember that in 1986 the index came down from 664 TO 390 in 1988 but these are stocks that went up 5 times. So, we could make money in a falling market.
Q: The first commonly excepted value investor in India was a gentlemen now deceased called Chandrakant Sampat, tell me a little bit about him?
Shah: Chandrakant Sampat was much ahead of his time. He used to not only read the general publications but he was a guy who talked to us about OID which not even many foreigners knew about - Outstanding Investors Digest. He would talk about Warren Buffett. Upto the year 1992 I think he got it really right. In fact it was an amazing thing that when you read about buy stocks when there is blood on the street, here was a guy in 1984 that day Indira Gandhi was assassinated, there were riots in Delhi, we were young guys running down on 27 storey stock exchange not knowing what is the future of our careers and we meet this man and ask him, what do you think? Here this guy is telling us buy Mico which is Bosch today and we were stunned. We did not expect him to tell us what to buy, we thought what will happen to the country. He said it is sad that Indira Gandhi has died but she can die only once and you won't get Mico at this price again. The guy really had some kind of temperament.
Q: He also explained compounding better than anybody else at that stage in the market?
Shah: He could explain compounding, he was able to explain margins saying that if there is sugar even in a vault an ant will manage to get there. Similarly if there is any margin that any business has competition will come in from anywhere. So, never dare to expect margins to survive at very high levels.
Q: The 1980's; extraordinary period. You came towards the fag end of the 1980's, but in the mid 1980's, three extraordinary investors that would leave their imprint on the Indian stock markets appeared. The first one was of course, Nemish Shah, the founder of this beautiful university. Tell me about him, you know him well.
Shah: Nemish actually came into the market somewhere in the early part of 1980. His father was an investor, but not into the markets and he was still not sure of what he is going to do with himself, but as I said earlier that Foreign Exchange Regulation Act (FERA) companies had started igniting the minds of all the youngsters in schools and colleges with the quick money that you could get out of those. So, all of us would be there in the afternoons. Whatever we were doing at lunchtime, to hang around and see if we could get something out of it.
Energy levels were high and obviously he has been extremely good at numbers. He had sharp memory for numbers, he still has and I think the curiosity to get in to everything that he could see then would drive him. And, the oldies in the market I would say to their disadvantage, were coming out of an era where you had the ’62 war, the ’65 war, ’71 war, emergency, and never seen a lasting boom. So most people would tell you that why are you wasting your time here? At a young age go out and do something else. So, it had to be someone who was inexperienced in that sense and who had a mind which was young and willing to do adventure that had to come. So, all these guys that you mentioned, they had all the qualities, the curiosity, the intensity.
Q: We mentioned Nemish Shah. The other name that commonly comes up in that period was a friend of both of ours, but you also knew him. Radhakishan Damani. Tell me about him.
Sethi: I think he is a legendary investor. He was ahead of his time, very quiet, focused on things that we think, he was into Colgates and Hindustan Unilevers and all the quality names way before our time. So, he had great foresight, he had in my view an amazing knack to stay, to listen. In all these years I have heard Radhakishan Damani speak very little. He is more of a listener, than a talker. I think he also has tremendous trading instincts. So he combines this ability of being a very long term investor and also having very good trading instincts.
Q: You tell a famous story or a famous phrase Radhakishan Damani taught you about buying value and quality, what is that?
Shah: What Vinod talked about, he had many of these qualities that very few people have in any case and if you go back a little further and see, he had to come into the markets because of a tragedy in his family. The father was running a firm and farther passed away suddenly. So, he had to come and take over a firm where there was speculation going on, clients speculating and this man comes in with insecurity, young and not knowing.
So, that insecurity of his drew him further into some of those things that Vinod talked about. But, very clearly, his wisdom was far apart. I remember very clearly in 1986, somebody was talking about Southern Petrochemical Industries Corporation (SPIC) and Premier Auto in the same breath, Colgate and Hindustan Unilever and in his own style he said, "Ek baat samajhlo, Dharavi, Dharavi hota hai, Peddar Road, Peddar Road hota hai." And that said it all, which I think even today, when you look at the markets, is phenomenal. So he articulated in one statement what Warren Buffet tries to say over every annual report.
Q: Let us bring in a third character who you said ‘he listens a lot’ R. K. Damani, but someone who does not listen, he talks a lot, but still he is enormously successful, enormously gifted, is Rakesh Jhunjhunwala. Another ‘R’ in the market. Came late into the markets, maybe around the time you entered the markets, ’88-’89. Durgesh, you know him well, he has taught at Flame; tell me a little bit about him and his investing style and his impact on the markets.
Shah: Again I think his energy level was enormous. I think he is probably a little different because he was qualified. He went to Bansi Mehta to do his CA and he was sharp in his numbers and law. Again, the thing is that he defied his family and came into the markets against their wishes. Because it was not considered a great place for even people who are not qualified to go, and here is a chartered accountant from Bansi Mehta’s firm going out and trying to do what he did. But he was extremely intense, you just had to be, times were different, in one building you had all these guys hanging around, there were only two hours of trading. So there was time before and after trading where you had nothing to do and all these intense guys would not want to go home till they had to. So if you could find him anywhere on the streets, you give him one bit of a moment and he will explain to you everything about Tata power and Sesa Goa and he knew them so well, he took such large positions, he took and understood somethings extremely well and I think it makes a lot of difference, I think his moment of the controversial call, or the call at which contrarian call where it made everything. He came in 1985, but in 1988, when Madhu Dandavate came out with a budget, he was extremely confident and he said that I do not care, and he went long and that I think made all the difference.
Q: 1989, you come to India, how did you go about investing? Was it allowed?
Sethi: Really, it wasn't allowed. Foreigners were not allowed into India at that stage. So, we had to work through the regulators and the Finance Ministry in particular to convince them about the whole idea of granting us a special dispensation. This was even before the FII regulations and SEBI and all. So, thankfully we did get a dispensation to operate through State Bank of India (SBI) in India.
Q: They say about bowling, if you are a cricket fan, that great bowlers hunt in packs. The other half of the hunting team with you was Madhav Dhar. Tell me about him?
Sethi: He is a very colourful chap. He was more of the macro person. He was sort of the bull in the china shop if you will. He had excellent relationships, him being the son of Mr PN Dhar, a famous bureaucrat, had good equations with lots of bureaucrats.
Q: But his dad was a left wing bureaucrat if I am not mistaken?
Sethi: And this guy was absolutely right wing. So opposites do go together.
Q: By virtue of their career where wizards with some extraordinary people on Wall Street and Dalal Street, two names I particularly want to ask you about give me a bio of them, Barton Biggs.
Sethi: Oh yes, Barton Biggs was the chairman of Morgan Stanley Asset Management. He combined great writing skills with great analytical mind and great love for markets. So, Barton Biggs was a visionary in that sense that he could use very good English to convey very complex ideas, thoughts. So, here was a part literature professor, part market participant and a visionary and a chairman of the firm. The most important quality he had is that he gave you full freedom to disagree and speak your mind.
Q: The other character - we often talk about Buffett - but the other one who has been very long term influential, perhaps not as well known; Julian Robertson. What do we learn from him?
Sethi: He is an absolute legend. He was one of my first clients and I got to interact with him fairly closely.
Q: At Morgan Stanley.
Sethi: Yes, he was Morgan Stanley's largest shareholder, largest client, largest everything.
Q: And trained legendary bunch of cubs?
Sethi: Yes and there is no surprise.
Q: Were you a cub of his?
Sethi: I thought so. For many years he was our largest client.
Q: What did you learn from him?
Sethi: I learnt from him how important it is to be alert, to be a listener, don't talk, value your time, take risks and gauge people well. The cubs are doing well because one man has selected all of them. That is Julian.
Q: You often talk about in the Chinese revolution Mao said let a thousand flowers bloom. In the 80s and 90s lots of good Indian companies were blooming. And between both of you - you were a witness to history. Let us just talk about some of the great companies of that era. Let us start with Infosys, your thoughts on that? You were one of the big early large investors in Infosys?
Sethi: Correct. Infosys, I don't know whether you know the Initial Public Offering (IPO) did very badly.
Q: It failed, you guys wrote the balance.
Sethi: Correct. I still remember meeting Mr Narayana Murthy for perhaps three or four hours at the sea lounge at The Taj where he was humbly trying to explain that this is what he does and why he will do well and all of that. My mind was already sort of made up that software exports would do very well from India. I studied at engineering colleges in India, I knew the wage arbitrage, it made sense. The business made absolute sense, there was no debate about it.
Q: And the rupee would depreciate, that was also given?
Sethi: Correct. So, the macros were in your favour. If you could hire an Indian engineer for Rs 50,000 those days which would cost USD 50,000 abroad - so, the basic theme was clear to me. I was looking for an execution person who would execute this thing. And it became very clear with Narayana Murthy and his team that they have been slogging it out for 15-20 years prior to that and something told you that if someone is sitting humbly and trying to explain this whole thing for three to four hours this guy is going to get somewhere. So, that was the call. The macro combined with a very good agent who seems to be leading a very good team in that industry and you were getting it at rock bottom prices, there was no one else to buy it.
Q: Enam also became famous with Infosys. What was the Enam thought process? In fact you took it public.
Shah: What Vinod is saying is very important but let me be very honest with you. This was immediately just 1993, just after the liberalisation of pricing of issues. So, there was Vallabh Bhansali and Nemish Shah and me and Siddharth going to this Infosys office in Bangalore and just as he said those guys trying to convince us at what price the issue should be made and of course Vallabh was finally the important person to all these things but since there was a valuation point coming in we were also there and Nemish and I thought it was expensive. So, we were completely wrong. Just because we had seen issues at such great valuations before that, we thought and most of the market thought like us. So, the issue didn't do well because you didn't have issues coming at those levels but what else Vinod could see and what we could not see was the future. The integrity and the ability of the person, the scalability, the rest is history. There was a phenomenal situation out there to see some guy who is going to absolutely make it and make India proud.
Q: We were talking about the great stocks of you era, there were so many great stocks that you had in your portfolio. You were the first one in so many of them; how did you judge whether this was an investable company, a great company? What were the criteria that you used?
Sethi: There were multiple criteria. One is your own inner voice as to the way India will sort of evolve, and the other is a lot of homework. Those days we read dozens of balance sheets every day.
Q: You still do, don't you?
Sethi: I still read three balance sheets a day of any company of the world. It is just a habit, I think it just hones your skills a little bit and combined with extensive visits. I think the combination of an internal voice, homework and field visits helped us filter a lot of the noise in the system.
Q: Tell me little bit of Vinod. We have talked about lot of personalities. He is very self-effacing and modest, but he has a pretty colourful and unique way of looking at things.
Shah: If you mention to him that what was different and how did he get to know and all kinds of things, I think it was on the streets there was this belief that there are some two kids come out of the US who are like cowboys going around shooting companies and stuff like that and it was very unusual. The fact is that there was this UTI, LIC and there were these institutions who had their own way of measuring yields and book values and buying stocks, and here were these guys who had started visiting companies, started talking to people and buying companies by the dozen. So, while LIC and UTI would give orders to brokers to buy small-small lots and collect over time, here were guys who were buying five percent to 15 percent of a company that they were allowed to. But it is his ability to see that Hero Honda will be in a position to make a dent into Bajaj auto. At that time most people thought that scooters will do very well, females could not drive motor cycles, they need sarees and you have to be sitting like this. There was a premium to buying a scooters and motor cycles were off the shelf and all kinds of things. And they could see it very clearly that Honda has 50 percent of the global market, they will figure out a product for India. They will know how to go about it over time and they went about their homework really well. Even today I would think that if the portfolio that he created at that time, buying 5-15 percent in companies like Infosys, Hero Honda, BHEL, Zee, Concor, Ambuja Cement and it would have been a formidable value.
Q: Almost like an all-star team; but the one stock that I always associated with him and I think he moved the market to his opinion, was HDFC.
Shah: He would call me from New York and try to explain to me that this is too cheap and 99 percent of Indians do not own houses and 99 percent of those guys can only do it with mortgages. So there is an open market, and there is just one player out there. The guys are decent, everything that the government is willing to do for them, and here I was trying to look for cheaper and smaller companies and it is crazy. I mean it was a huge opportunity sitting out there.
Q: HDFC is a remarkable stock to have picked. How did you stumble upon it and when you picked it, could you sleep at night because you were so excited by the prospects?
Sethi: I always sleep well at night come what may. So sleep whatever you do in life, your sleep should be undisturbed. Eight hours. I looked at HDFC, one analyst Praveen Shah had showed up in my office, he was the head of Direct Stock Purchase (DSP) research. So among all the things he was talking, he brought one pager on HDFC, so I looked at it, I just listened. I did not tell him what my thinking was and so on and so forth. But I said I would like to meet Deepak Parekh. I would like to meet the managing director and so DSP arranged that meeting. So we met them, we understood the business, they were very kind, they explained the whole thing to us, and here was a world class company trading at perhaps two or three times earnings, I forgot the exact number, but certainly less than four times. This is I think late 1990 and so I spoke to lots of intelligent people, I am humble enough to know that I could be wrong. So if something is so cheap, either I am brain dead, or someone else is. So I always assume that I am brain dead. And so I went around and spoke to lots of people as to why? Why so cheap? There were all sorts of explanations. One of them is, there are no assets, rented office, everything is rented. It could close tomorrow. Employees walk home at night. It started off that way and then clearly I realized that people had not thought this through. That people focused disproportionately on the balance sheet rather than on the income statement. And so there was no doubt in my mind that the country was homeless, I mean how could you go wrong?
Q: We talked about some great investors, we talked about Radhakishan Damani, Nemish Shah, Rakesh Jhunjhunwala; great investors are associated with a stock. It is a defining stock, it is magnum opus, defines them. Let us go through the names. What stock would you define Nemish Shah with?
Shah: I think the big thing happened with ACC 1992 on the long side.
Q: The decontrol of cement?
Shah: No, that was earlier. This was after that. So, just before the boom happened, and as we said that from 1988 to 1992, was a whole big phase.
Q: And for the record, ACC went from Rs 300 to Rs 10,000 in a period of four years. He got that right. What did he understand about the company?
Shah: Precisely. He got it hugely right. Typically, see markets move in pendulums. So, when we talked about Infosys also earlier, the fact was that after 1992, there was a bear market, everything was down in the dumps, because we went overboard. So same thing in 1988, we had gone do a level where things had become much cheaper. So you go on to one side of the pendulum and then it has to come back. So things were too compelling and it was not possible to put up another cement plant if those were the returns that you would be getting. It was not possible to look at distances and it was a matter of right time that things would come back.
Sethi: Let me add a little anecdote on this. I met the management of ACC, the managing director when the price was Rs 300, the legendary stock of the long of Nemish, and at Rs 300, the first question to me was why are you even here? There is no future for cement.
Q: The management itself was pessimistic.
Sethi: So, the biggest bear on at the bottom of the cycle that he was talking about was that the most bearish at that time was the management itself.