“It is very important that allocation is optimum,” he told CNBC-TV18’s Latha Venkatesh. Allocation, he said, is at the heart of this year’s wealth creation study.
India is not entering a bull market like the one seen in 2003, Agrawal said, adding, global markets are likely to continue their rally. Donald Trump’s promise on corporate tax reduction could have a huge impact on the US economy.
But, Agarwal feels Indian market is not very far from new high.
Below is the verbatim transcript of Raamdeo Agrawal’s interview to Latha Venkatesh on CNBC-TV18.
Q: Year after year you come and present to us your Wealth Creation Study. How would you describe it, a systematic way of thinking about stock selection?
A: Thinking about understanding how the markets work and what are the one or two qualities you can imbibe this year so that you can be better for the next 12 months and yet another one.
Q: What would you say is the most important theme of your 21st Wealth Creation? If I read your point right, stock selection is what you have spoken about, your QGLP – quality, growth, longevity, and price what you have always told us. However, today you have come with a different first theme in your study. It is not just what to select but how much to allocate. So, tell us about this first mantra for the current study.
A: Basically, to make money in the market, you need to buy right stock; that is the very first step. So, you bought the stock; the second powerful engine is how much you buy. What to buy and how much to buy. So, the first 20 studies from 1996 till 2016, we took care of what to buy – quality, dividend oriented, at what price to buy, what kind of businesses to buy. So, all kinds of things we covered in first 20 studies. Then we said this is the very important part of the portfolio management that is how much to buy, how to build a portfolio, how to allocate.
So that is a second engine but as powerful as the first engine. However, in academy, there is very little on this because there is no framework to say you should buy 10-12 percent or 5 percent of but yet it is very important and everybody is practicing, trillions of dollars of being invested.
Q: When you were explaining this before you started off, you said that for instance you have Eicher Motors in your Focused 25 and in Focused 35 but one of them does better because it has a greater portion in Eicher. Exactly how do you allocate, is that also part of your study?
A: That is the heart of it. Say if you have two portfolios, in one place you have say Eicher or Bajaj Finance which I say doubled in last 12 months. If you have something doubling in 12 months, in one portfolio you have 5 percent and in other portfolio 10 percent. The differences in the performance it will make a difference of at least 5 percent in terms of one portfolio or other. So, when you have winning stock in the same house and you have 5 percent in one and 10 percent in other, maybe 15 percent in other, the 15 percent performs better.
So, it is all about the compounded performance of the portfolio and you are always seeking to enhance the performance. By chance — another way, that 5 percent which is not there say in Bajaj Finance, if that goes to another inferior company which actually doesn’t do well, so, you get double kind of punishment. So, it is very important that your allocation is optimum and the winning horses, they get the big bet and the one which is not so great, they get less of it.
Q: You are also speaking about the fact that you should try to get an edge — now we don’t have an information edge because now information is commoditised and therefore you should have an analytical edge but to come to the way the stock market is at this point in time, which sector do you think can have that kind of an edge. We are getting into digitisation, we are getting into more people using the formal financial sector, so, what according to you in this stage is the most likely sector that can have the characteristics of what you are looking for?
A: There are two types of advantages an investor has. One is informational advantage and second is analytical advantages. As you said, informational advantages are kind of dissipating. It is almost online, everything Google has given and even the companies they have to first disclose and then deliberate about it. So, there is not much of informational advantage; still there but not that much.
If you come to know about the growth plans of the company, if they are going to get some patents, they have cracked some cost structure, or they have got some new MD coming in who is master of the game, so those are informational advantage you have. You can bet on the leadership change, management change or some new product innovation. So, those are informational advantages.
However, analytical advantage is to do with how those businesses are run. Say like value migration. Now, the analytical framework is that the old business models, they give way to the new business model.
So, public sector banks are suffering and the private sector banks are gaining edge because of the better competition and technology and everything. Banking sector is growing at 15 percent, and these guys are almost 70 percent which will go to say from 70 percent — it goes to by chance 30-40 percent in 10 years, then this on a 15 percent growing industry — if the market share also goes from 30 percent to 60 percent — you are looking at 20-25 percent growth for the private sector.
Now, which is the best private sector bank? So, this is how analytical advantages in understanding which way the wind is blowing, where is the tailwind. In businesses, all large business which are built, we give credit to MD or owner of the company but bulk of the benefits are because of the tailwind.
So, you have to understand from the analytical framework where is the tailwind going to be or where is the tailwind right now and where is the tailwind going to be and then the king of the tailwind, the best of the lot say in private sector banking you have an HDFC, we have IndusInd Bank, you have ICICI Bank, you have Axis Bank, you have new set of banks coming in RBL and others, so, which one to bet on at the given price, that then becomes a company specific issue.
Q: Since we have you at a very critical juncture, we have seen this huge bull rally in global markets, what started on November 8 in US markets seemed to be just a Trump season and now it is getting to be bigger. Do you think we are entering something like a phase we saw in 2003, do you think that this wind can be a little bigger than we have seen in the last five to six years?
A: In 2003 also when it started, I was skeptical for first year. After 8-10 years we are overdue for this but if you ask me, I don’t feel like that, at least for Indian market right now. Global markets, actually yes, because Trump’s promise of dramatic reduction in the corporate tax rate can have a huge impact in the way America works, the way dollar can be very strong, the way US corporate profits can zoom.
So, that optimism is building into and then bond yields are going up. So, all the fixed income guys, they are dumping the bonds and getting into equity. So, there is a lot happening in that side of the world. We are stuck here in our own local kind of challenges.
Q: You don’t get a sense that there is probably a bottom in place, after all the credit policy was expected to give a rate cut, it didn’t give a rate cut, demonetisation – most brokerages have reduced their earnings but the market has chugged on. Are you getting a sense that it has been able to put a bottom?
A: The Maggie moment is over — in the sense that the withdrawal of the brand or the withdrawal of the money, that gave a 8-10 percent or whatever downturn, that has happened and now at what pace it will recover to go back to the old levels and then new high. That maybe two to three months as the economy comes back from the demonetisation effect I think we will get to see more of it. Maybe we might come back with a lot more vigor.
Q: So a new high in 2017 looks possible you think?
A: Because we are not very far off from the new high. So, 12-15 percent can always happen but one is always wrong when it comes to predicting the levels even on a one year basis. However, I always remain optimistic; we are fully invested though skeptic at this level.
Q: You are not in cash at all?
A: No, we have never been in cash. In between when the demonetisation thing came, that time we held it back a little bit, we said let us stagger it but the moment this kind of bottom happened or we felt that it is not going to go down more, then we said let us go back to our natural pace of buying which is whenever money comes, we buy, whenever they need the money, we sell.
Q: To end the conversation where we began, Eicher. You still think that it is going to give the kind of multi-bagger returns it has already given you?
A: It cannot give. It must meet my portfolio objective. Can it double in three or four years — that is the call.
Q: It is no more the Ajanta Pharma of your portfolio?
A: No, you will not ask those names because they will not be as popular because they will be mostly unpopular and only we or few more people can see not the masses, then only we can make multi-bagger. Right now these are at best double in three to four years.